Quiz 4: Financial management weeks 7 and 8 and is based on material from chapters 8 to 10
ABDC Corporation has a target capital structure of 30% long-term debt and 70% common stock equity. The firm's before-tax cost of debt is 6.45% and its cost of equity is 12.85%. Assume that ABDC is in the 33% income tax bracket, what is ABDC's weighted average cost of capital? (Please round you answer to the nearest 0.1%, e.g. 10.1% should be shown as 0.101).
0.103
Ben's Bulk Barns is a wholesale wholefoods merchant and is investigating several mechanisms to reduce its cash conversion cycle. The first is a new inventory control and ordering system which will reduce average age of inventory from 85 days down to 48 days. The second policy change it is considering is introducing a discount for its credit customers who pay their account in full earlier. This is likely to reduce the average collection period from 52 days down to 34 days. If both changes are implemented, what will Ben's Bulk Barns cash conversion cycle be if its average payment period remains at 32.4 days?
Please see Chapter 9: Cash conversion cycle and equation 9.6 where CCC=AAI+ACP-APP. The correct answer is: 50
The management of ThinkBig Ltd are considering two alternative development strategies for a section of land in central Timaru. Both alternatives have a 3-year life and will cost about $7 million. Alternative A is expected to generate annual cash inflows of $5 million, while Alternative B is expected to generate cash inflows of $6 million in year 1, $5 million in year 2, and $3.9 million in year 3. Assuming that a discount rate of 12% is considered appropriate for both investments, which alternative would be preferred? Select one: a. Alternative A, because the average return is greater. b. Alternative A, because the total return is greater. c. Alternative A, because percentage return is greater. d. Alternative B, because the present value of cash flows is greater. e. Cannot be determined.
See Objective of financial management in Chapter 8. Use the PV of multiple cash flows formula in Chapter 5: d The correct answer is: Alternative B, because the present value of cash flows is greater.
Betty's Kitchen Ltd. currently holds 90 days of inventory, collects accounts receivable in 30 days, and pays accounts payable in 45 days. The length of Betty's cash conversion cycle is: Select one: a. -15 days. b. 15 days. c. 75 days. d. 105 days. e. 165 days.
Use the cash conversion cycle formula in Chapter 9: The correct answer is: 75 days.
Calculate the implicit interest cost of foregoing the cash discount from a supplier who offers credit terms as follows: net 45 days from invoice date; 2% cash discount if paid within 10 days. Select one: a. 16.6%. b. 20.9%. c. 21.3%. d. 24.5%. e. 40.8%.
Use the cash discount formula in Chapter 9: c The correct answer is: 21.3%.
Wimpy Widgets Limited plans to issue bonds at a cost of 12%. If the firm pays tax at a rate of 30 percent of profits, the after-tax cost of debt is: Select one: a. 3.60%. b. 8.40%. c. 9.23%. d. 17.14%. e. 40.00%.
Use the cost of debt formula in Chapter 10: The correct answer is: 8.40%.
Anzac Corporation issued preference shares 8 years ago at a par value of $10.00 per share. If preference shares are paying $0.96 in dividends per year and the current market price is $6.12, what is the required return for Anzac's preference shares? (The allowed rounding error for this question is within 0.1%. Please type your answer in decimals. For example 9.8% should be shown as 0.098)
Use the cost of preference shares formula in Chapter 10: The correct answer is: 0.157
Anzac Corporation issued preference shares 8 years ago at a par value of $10.00 per share. If preference shares are paying $1.11 in dividends per year and the current market price is $11.78, what is the required return for Anzac's preference shares? (The allowed rounding error for this question is within 0.1%. Please type your answer in decimals. For example 9.8% should be shown as 0.098)
Use the cost of preference shares formula in Chapter 10: The correct answer is: 0.094
An issue of bonds in London, denominated in New Zealand dollars, by a New Zealand company is an example of a: Select one: a. eurobond. b. foreign bond. c. eurodollar deposit. d. eurocurrency loan. e. euroequity issue.
a
Financial analyses emphasise cash flows rather than profits for all of the following reasons except: Select one: a. cash flows result in a better matching of revenues and costs. b. cash flows can be objectively observed directly from banking records. c. the measurement of profits can vary depending upon accounting practices followed. d. owners returns are measured using cash flows. e. cash flows determine a firm's liquidity and solvency.
a
Financial management is important to business firms because: Select one: a. it assists the firm to achieve its goals and objectives. b. it allows the firm to undertake risky investments. c. it correctly focuses management on profit maximisation. d. it quantifies shareholders' preferences for later returns over earlier returns. e. None of the above.
a
Solvency refers to: Select one: a. the ability of a person or organisation to meet their financial commitments as they come due. b. the ability of a business to exit from an existing contract. c. a legal requirement for managers to behave in an ethical manner. d. the payment of dividends by a company to its shareholders.
a
The collection policy of a firm refers to: Select one: a. the procedures adopted to collect accounts receivable. b. specifying the repayment requirements for all customers. c. assessing the creditworthiness of customers. d. the credit standards.
a
Two companies offer similar five-year bonds, but Company A pays 8% annual interest while Company B pays 6%. What would you conclude about the relative risks of each company? What would you conclude about the risk attitudes of the investors in each company? Select one: a. Company A is riskier; investors in A are less risk averse. b. Company A is riskier; investors in A are more risk averse. c. Company B is riskier; investors in B are less risk averse. d. Company B is riskier; investors in B are more risk averse. e. Cannot be determined.
a
Which of the following may be included in a forecast cash flow statement for the month of March? Select one: a. Rent paid in March. b. March depreciation expense. c. The closing March balance of accounts receivable. d. The closing March balance of accounts payable. e. All of the above may be included.
a
The speculative motive induces firms to hold at least some cash balances for the purpose of: Select one: a. taking advantage of unexpected investment opportunities as they arise. b. meeting unforeseen operating expenses. c. paying predictable operating cash needs as they fall due. d. meeting unforeseen financing expenses.
a See Managing cash in Chapter 9. The correct answer is: taking advantage of unexpected investment opportunities as they arise.
BigPlans Limited has taken out a mortgage on its facilities at a cost of 15%. The firm's debt ratio is 50% and the cost of equity is 20%. If the corporate tax rate is 30 percent, then the after-tax cost of debt is: Select one: a. 10.50%. b. 10.71%. c. 11.54%. d. 14.00%. e. 25.00%.
a Use the cost of debt formula in Chapter 10:
If the cost of foregoing a discount, CD is greater than the opportunity or finance costs, then the decision of whether to accept or forego a discount for the early payment of accounts can be summarised as: Select one: a. Reject the discount and pay early. b. Accept the discount and pay early. c. Reject the discount and pay the full amount later. d. Accept the discount and pay the full amount later.
b
In a company, it is the responsibility of _____________ to elect ____________ whose role is to set the strategic objectives and rules for governing the company. Select one: a. management; auditors b. the shareholders; the Board of Directors c. the Board of Directors; managers d. the owners; managers e. management; the Board of Directors
b
In the context of accounts receivable management, credit standards refer to: Select one: a. the standards and guidelines that govern the management of accounts receivable. b. the criteria used to evaluate the creditworthiness of customers. c. the repayment requirements for all customers. d. the procedures adopted to collect accounts receivable.
b
Owners can encourage managers to act consistently with shareholder wealth maximisation by: Select one: a. rewarding managers on the basis of short-term profitability. b. incurring agency costs. c. reducing managers' personal wealth. d. minimising managers' benefits and perks. e. rewarding managers for taking more risk.
b
The inventory management technique that seeks to determine the optimal order quantity that minimises total holding and ordering costs is: Select one: a. the ABC system. b. the EOQ model. c. the just-in-time system. d. the accounting system.
b
The major sources of funds available during the growth stage of the business life cycle are: Select one: a. personal investment from owner, friends and relatives, venture capital, banks and finance companies and suppliers. b. personal investment from owner, friends and relatives, venture capital, banks and finance companies, suppliers, retained earnings and private placements. c. banks and finance companies, suppliers, retained earnings, private placements, public offerings and offshore securities. d. personal investment from owner, friends and relatives, banks and finance companies, suppliers, retained earnings and offshore securities. e. venture capital, banks and finance companies, private placements and public offerings.
b
The major sources of funds available during the growth stage of the business life cycle are: Select one: a. personal investment from owner, friends and relatives, venture capital, banks and finance companies and suppliers. b. personal investment from owner, friends and relatives, venture capital, banks and finance companies, suppliers, retained earnings and private placements. c. banks and finance companies, suppliers, retained earnings, private placements, public offerings and offshore securities. d. personal investment from owner, friends and relatives, banks and finance companies, suppliers, retained earnings and offshore securities. e. venture capital, banks and finance companies, private placements and public offerings.
b
Which of the following external events is least likely to have an impact on the financial decisions of a publicly-listed company? Select one: a. The government increases corporate income taxes. b. Two small insurance companies merge. c. The New Zealand and Sydney stock exchanges merge. d. New Zealand and Australia announce a common currency. e. The Reserve Bank tightens monetary conditions.
b
Which of the following statements concerning factoring is false? Select one: a. The factor provides credit-checking facilities. b. Finished goods inventory is pledged as collateral for the loan. c. The factor mails monthly statements of account to the client's customers. d. The factor often fulfils the function of collecting the client's accounts receivable.
b
Wishbone Ltd. are seeking to reduce their cash conversion cycle of 120 days. To achieve this, they could: Select one: a. Pay their accounts payable more quickly. b. Reduce inventory levels. c. Relax credit standards on accounts receivable. d. Extend the credit period on accounts receivable.
b
If a firm changes its credit policy to "cash sales only" so that trade credit is no longer extended, a likely consequence is: Select one: a. an increase in bad debts expense. b. a decrease in interest costs for financing the investment in accounts receivable. c. an increase in sales. d. an increase in collection costs. e. an increase in inventory.
b The correct answer is: a decrease in interest costs for financing the investment in accounts receivable.
A private placement is: Select one: a. an issue of securities by a private company to the public. b. capital raised overseas. c. the sale of shares or debt only to selected investors. d. an informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time. e. a pagan ritual.
c
Due to the short-term nature of working capital, a suitable objective of working capital management is: Select one: a. minimise losses. b. maximise liquidity. c. achieve an optimal balance between profitability and risk which maximises owners' wealth. d. minimise risk. e. None of the above.
c
During the start-up and early growth stages of a firm's life cycle, banks and financial institutions are least likely to provide the firm with: Select one: a. a short-term secured loan. b. a bank overdraft. c. an unsecured loan. d. an operating lease. e. a hire-purchase loan.
c
Financial management can be described as the: Select one: a. analysis of economic activities and their effect on businesses. b. strategic management of the firm's assets. c. activities and decisions undertaken with regard to the financing and investment requirements of an organisation. d. provision of financial services to corporations and individuals.
c
For a proprietorship, the financial objective of wealth maximisation refers to the maximisation of: Select one: a. the market price of the firm's shares. b. owners' drawings. c. owners' equity. d. accounting profits. e. none of the above.
c
If managers do not act in a manner consistent with shareholders' interests, a likely consequence may be that: Select one: a. the risk of the firm decreases. b. profitability is enhanced. c. shareholder wealth is diminished. d. the company share price increases. e. All of the above.
c
If managers do not act in a manner consistent with shareholders' interests, a likely consequence may be that: Select one: a. the risk of the firm decreases. b. profitability is enhanced. c. shareholder wealth is diminished. d. the company share price increases. e. All of the above.
c
Inventory management techniques include all of the following except: Select one: a. the EOQ model. b. the just-in-time system. c. the equivalent annual annuity technique. d. a computerised inventory control system.
c
The purpose of a forecast cash flow statement includes all of the following except: Select one: a. it is a supporting document required to accompany most loan applications. b. it allows time to arrange additional financing. c. it reports the historical cash flow patterns to investors. d. the amount and timing of surplus cash expected for investment is revealed. e. it shows the forecast amount of cash expected to be available for dividend payments.
c
The separation of the roles of ownership and management occur in: Select one: a. partnerships. b. sole proprietorships. c. companies. d. None of the above e. All of A, B and C
c
The transactions motive induces firms to hold at least some cash balances for the purpose of: Select one: a. taking advantage of unexpected investment opportunities as they arise. b. meeting unforeseen operating expenses. c. paying predictable operating cash needs as they fall due. d. meeting unforeseen financing expenses.
c
Which of the following parties would not normally be considered to be a claimant on a company's earnings? Select one: a. Lenders. b. Employees. c. Customers. d. Managers. e. Owners.
c
Which of the following parties would not normally be considered to be stakeholders of a business organisation? Select one: a. Lenders. b. Employees. c. Politicians. d. Managers. e. Owners.
c
Which of the following statements is false concerning the cost of capital to a firm? Select one: a. It incorporates the cost of raising and using finance. b. It represents the rate of return required by the firm's investors. c. It is a short-term concept, suitable for evaluating short-term profit performance. d. It is the return that a firm must earn in order to maintain the firm's value. e. It is incorporated into the required returns set by management to evaluate proposed investments.
c
A decrease in current assets will normally: Select one: a. decrease the firm's overall rate of return, and increase the risk of financial distress. b. decrease the firm's overall rate of return, and decrease the risk of financial distress. c. increase the firm's overall rate of return, and decrease the risk of financial distress. d. increase the firm's overall rate of return, and increase the risk of financial distress.
d
A public offering is: Select one: a. a publicly-announced pledge of accounts receivable. b. the sale of shares or debt only to selected investors. c. an informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time. d. an issue of securities by a company to a large number of investors. e. a religious sacrifice.
d
All of the following are included in a forecast cash flow statement except: Select one: a. cash sales. b. capital contributions from owners. c. GST received from sales. d. depreciation expense. e. loan repayments.
d
Assuming sales remain constant, as the level of inventory decreases, then inventory holding costs ________ , financing costs ________, and profits ________ Select one: a. decrease; decrease; decrease. b. increase; decrease; decrease. c. decrease; increase; decrease. d. decrease; decrease; increase. e. decrease; increase; increase.
d
Financial forecasting and planning includes: Select one: a. preparing cash flow forecasts. b. preparing forecast financial statements. c. analysis of historical investments. d. A and B. e. A, B and C.
d
Financial intermediaries who specialise in servicing the funding needs of medium and large companies are known as: Select one: a. sharebrokers. b. factors. c. finance companies. d. investment banks. e. business angels.
d
Frugal Ltd has the opportunity to purchase supplies on credit terms of 'net 60 days from invoice date; 0.5% cash discount for payment within 14 days'. If Frugal currently has excess funds invested in marketable securities that earn an effective annual interest rate of 6%, should Frugal take or forego the discount? Select one: a. Take the cash discount and pay on the 14th day after the invoice date. b. Take the cash discount and pay on the 60th day after the invoice date. c. Forgo the cash discount and pay on the 14th day after the invoice date. d. Forgo the cash discount and pay on the 60th day after the invoice date. e. Forgo the cash discount and pay on the 46th day after the invoice date.
d
Inventory management attempts to balance the cost-benefit trade-offs by minimising the total of: Select one: a. holding and order costs. b. holding and stock-out costs. c. order and stock-out costs. d. holding, order and stock-out costs. e. holding costs.
d
The Euromarkets allow large, reputable companies to: Select one: a. fund substantial requirements for equity and debt. b. reduce costs of financing. c. legally pay no tax on their investment income. d. A and B only. e. All A, B and C.
d
The financial manager of Whakapapa Limited is assessing two investment proposals, L and P. Proposal L is expected to earn a return of 14%, while Proposal P is expected to earn a return of 16%. If the manager accepts Proposal L and rejects Proposal P, then the risk-return trade-off would imply that: Select one: a. the manager is irrational. b. the manager prefers high-risk projects. c. Proposal L is riskier than Proposal P. d. Proposal P is riskier than Proposal L. e. A, B and C.
d
The risk-return trade-off implies that, for a project to be _________, the ________ return must be greater than the _________ return. Select one: a. proposed; required; expected b. rejected; expected; required c. rejected; expected; proposed d. accepted; expected; required e. accepted; required; expected
d
The three motives for firms to hold at least some cash balances are: Select one: a. start-up, growth and maturity. b. economic, management and strategic. c. entity, going concern and matching. d. transactions, safety and speculative. e. None of the above.
d
The time value of money: Select one: a. infers that if all else is equal, later returns are preferred over earlier returns. b. implies that profit maximisation is a suitable goal in finance. c. is explicitly considered in profit maximisation. d. is implicitly considered in share prices. e. recognises that the purchasing power of $1 normally increases over time.
d
Three strategies for managing the cash conversion cycle are: Select one: a. Maximise the average age of inventory, minimise the average collection period and minimise the average payment period. b. Minimise the average age of inventory, minimise the average collection period and minimise the average payment period. c. Minimise the average age of inventory, maximise the average collection period and maximise the average payment period. d. Minimise the average age of inventory, minimise the average collection period and maximise the average payment period. e. Maximise the average age of inventory, minimise the average collection period and maximise the average payment period.
d
Wealth maximisation is an appropriate goal of financial management because it considers: Select one: a. the time value of money. b. the magnitude of cash flows. c. risk. d. All of the above. e. None of the above.
d
Which of the following is likely to result in a decrease in the investment in net working capital? Select one: a. Increase current assets. b. Decrease current liabilities. c. Increasing delays in the collection of accounts receivable. d. Slower payment of accounts payable. e. Increasing inventory levels.
d
Which of the following statements concerning financial leases is true? Select one: a. They tend to be short-term. b. They are usually cancellable. c. The title to the asset usually passes to the borrower automatically at the end of the lease. d. They are treated as debt financing arrangements for the purchase of an asset, for both income tax and financial reporting purposes.
d
Which of the following statements concerning the New Zealand dividend imputation tax system is true? Select one: a. It results in equity earnings being taxed twice: once when profits are earned and again when dividends are paid to shareholders. b. It leads to a strong bias in favour of debt finance. c. Shareholders do not report dividends received as income on their personal tax returns. d. It reduces the relative tax advantage of financing with debt compared with equity sources.
d
Which of the following statements is most correct concerning working capital and its management? Select one: a. The goal of working capital management is to maximise the firm's liquidity. b. Working capital refers to long-term financing. c. Working capital typically has little effect on the profitability and risk of an organisation. d. Current assets may represent a large proportion of total assets. e. The higher the level of net working capital, the higher the risk.
d
Marketable securities can best be defined as: Select one: a. financial claims that can be purchased but not sold via the financial markets. b. securities suitable for long-term investment purposes. c. contributed capital supplied by equity investors. d. short-term interest earning financial claims that can be quickly converted to cash without any significant loss of value. e. grocery store discount coupons.
d See Managing cash in Chapter 9.
Which of the following statements about asset valuation is true? If all else is equal, then: Select one: a. the longer the delay before a benefit is received, the higher the present value of the asset. b. the shorter the delay before a benefit is received, the lower the present value of the asset. c. the greater the uncertainty about the size of a future benefit, the higher the present value of the asset. d. the lower the uncertainty about the size of a future benefit, the higher the present value of the asset. e. None of the above is true.
d See The external environment in Chapter 8. The correct answer is: the lower the uncertainty about the size of a future benefit, the higher the present value of the asset.
Examples of marketable securities include: Select one: a. treasury bills and finance company debentures. b. certificates of deposit and accounts receivable. c. equity share investments and commercial bills. d. inventory and certificates of deposit. e. treasury bills and commercial bills.
e
If Little Ltd has current assets of $200,000 and current liabilities of $120,000, then it can be inferred that: Select one: a. Little Ltd is suffering from liquidity problems. b. $80,000 of current assets have been financed with long-term funds. c. net working capital is inadequate. d. $120,000 of current assets have been financed with short-term funds. e. B and D only.
e
It is through the financial markets that the ______________ through the buying and selling activities of market participants. Select one: a. risk of a company is set b. profits of a company are determined c. dividends of a company are set d. value of a proprietorship is set e. the value of a listed company is set
e
Managers who fail to act in a manner consistent with the wealth maximisation objective may: Select one: a. be rewarded with higher salaries. b. be fired. c. cause the company share price to rise. d. expose the company to a take-over bid. e. Both B and D.
e
Successful firms may be able to obtain bank or financial institution financing by: Select one: a. pledging their accounts receivable. b. offering finished goods inventory as collateral for a short-term loan. c. factoring their accounts receivable. d. invoice discounting. e. all of the above.
e
The safety motive induces firms to hold at least some cash balances for the purpose of: Select one: a. taking advantage of unexpected investment opportunities as they arise. b. meeting unforeseen operating expenses. c. paying predictable operating cash needs as they fall due. d. meeting unforeseen financing expenses. e. B and D only.
e
The value of any asset depends on: Select one: a. the expected benefits to be received. b. the expected timing of the financial benefits. c. the expected magnitude of the benefits. d. the expected risk of the asset. e. All A, B, C and D.
e
Trade credit can be an important source of finance as it: Select one: a. has no explicit interest cost. b. increases spontaneously as purchases are made, without the need to request further credit. c. is essentially equivalent to an interest-free loan. d. allows a customer to obtain unlimited credit from suppliers. e. All of A, B and C.
e
What is the objective of financial management? Select one: a. Maximise the benefit/cost ratio. b. Maximise profits. c. Maximise earnings per share. d. Maximise return on investment. e. Maximise shareholder wealth.
e
Which of the following is NOT likely to be a consequence of holding insufficient levels of inventory? Select one: a. Increased stock-outs. b. Production bottlenecks. c. Lost sales. d. Reduced inventory financing costs. e. Increased investment in accounts receivable.
e
Which of the following statements concerning forecast cash flow statements is true? Select one: a. Actual figures may deviate from those expected. b. Large discrepancies between actual and forecast balances may signal possible problems. c. The statements should be periodically updated and extended. d. They give an indication of the firm's liquidity and solvency. e. All of the above are true.
e
rade credit can be an important source of finance as it: Select one: a. has no explicit interest cost. b. increases spontaneously as purchases are made, without the need to request further credit. c. is essentially equivalent to an interest-free loan. d. allows a customer to obtain unlimited credit from suppliers. e. All of A, B and C.
e
