BUSFIN exam 3
Fig Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed costs = $216,400. The depreciation is $94,700 a year and the tax rate is 40 percent. What effect would an increase of $1 in the selling price have on the operating cash flow? A. $4,380 B. $4,823 C. $5,316 D. $5,448 E. $7,300
A. $4,380
Shane's Music has a line of credit with a local bank that permits it to borrow up to $750,000 at any time. The interest rate is 0.28 percent per month. The bank charges compound interest and also requires that 4 percent of the amount borrowed be deposited into a non-interest-bearing account. How much interest will the firm pay if it needs $500,000 of cash for four months to pay its operating expenses? A. $5,857.88 B. $5,949.21 C. $6,017.02 D. $6,039.91 E. $6,208.11
A. $5,857.88
Consider a three-year project with the following information: initial fixed asset investment = $770,000; straight-line depreciation to zero over the three-year life; zero salvage value; price = $34.99; variable costs = $23.16; fixed costs = $245,000; quantity sold = 94,500 units; tax rate = 40 percent. How sensitive is OCF to an increase of one unit in the quantity sold? A. $7.10 B. $7.73 C. $8.67 D. $9.97 E. $11.83
A. $7.10
A project has sales of $462,000, costs of $274,000, depreciation of $26,000, interest expense of $3,400, and a tax rate of 35 percent. What is the value of the depreciation tax shield? A. $9,100 B. $9,564 C. $10,650 D. $10,800 E. $11,350
A. $9,100
The Cannon Ball has projected its first quarter sales at $11,200, second quarter sales at $10,900, and third quarter sales at $13,300. The firm's cost of goods sold is equal to 71 percent of the next quarter's sales. The accounts receivable period is 30 days and the accounts payable period is 60 days. At the beginning of the first quarter, the firm has an accounts receivable balance of $2,800 and an accounts payable balance of $6,300. The firm pays $1,500 a month in cash expenses and $200 a month in taxes. At the beginning of the first quarter, the cash balance is $530 and the short-term loan balance is zero. During the first quarter, the firm is planning on spending $2,600 for some new equipment. The firm maintains a minimum cash balance of $20. Assume each month has 30 days. What is the cumulative cash surplus (deficit) at the end of the first quarter, prior to any shortterm borrowing? A. -$2,403 B. -$1,983 C. -$857 D. -$837 E. -$667
A. -$2,403
Alpha Industries is considering a project with an initial cost of $7.4 million. The project will produce cash inflows of $1.54 million a year for seven years. The firm uses the subjective approach to assign discount rates to projects. For this project, the subjective adjustment is +1.5 percent. The firm has a pretax cost of debt of 8.6 percent and a cost of equity of 13.7 percent. The debt-equity ratio is 0.0.65 and the tax rate is 35 percent. What is the net present value of the project? A. -$372,951 B. -$187,016 C. $48,209 D. $133,333 E. $269,480
A. -$372,951
Birds of a Feather has 10-year bonds outstanding that carry an annual coupon of 8 percent. The bonds mature in 7 years and are currently priced at 110 percent of face value. What is the firm's pretax cost of debt? A. 6.20 percent B. 6.60 percent C. 7.34 percent D. 7.70 percent E. 8.23 percent
A. 6.20 percent
You are given the following information concerning Around Town Tours: -Debt: 8,500, 7.1 percent coupon bonds outstanding, with 14 years to maturity and a quoted price of 102.6. These bonds pay interest semiannually. -Common stock: 265,000 shares of common stock selling for $76 per share. The stock has a beta of 0.92 and will pay a dividend of $2.48 next year. The dividend is expected to grow by 4 percent per year indefinitely. -Preferred stock: 7,500 shares of 6 percent preferred stock selling at $88 per share. -Market: A 13.2 percent expected return, a 4.5 percent risk-free rate, and a 34 percent tax rate. Calculate the WACC for this firm. A. 8.22 percent B. 8.67 percent C. 9.29 percent D. 9.57 percent E. 10.08 percent
A. 8.22 percent
Which of the following costs tend to rise when a firm switches to a flexible financial policy from a restrictive financial policy? I. restocking costs II. lower prices to offset limited selection III. storage costs IV. current asset opportunity costs A. I and II only B. III and IV only C. I, III, and IV only D. I, II, and III only E. II, III, and IV only
B. III and IV only
Orchard Farms has a pretax cost of debt of 7.68 percent and a cost of equity of 15.2 percent. The firm uses the subjective approach to determine project discount rates. Currently, the firm is considering a project to which it has assigned an adjustment factor of -0.5 percent. The firm's tax rate is 34 percent and its debt-equity ratio is 0.45. The project has an initial cost of $4.3 million and produces cash inflows of $1.27 million a year for 5 years. What is the net present value of the project? A. $121,619 B. $328,895 C. $514,370 D. $561,027 E. $628,721
B. $328,895
The Green Mile has the following estimated quarterly sales for next year. The accounts receivable period is 45 days. What is the expected accounts receivable balance at the end of the third quarter? Assume each month has 30 days. A. $4,300 B. $4,750 C. $5,600 D. $6,667 E. $8,600
B. $4,750
The company predicts that 2 percent of its credit sales will never be collected, 45 percent of its sales will be collected in the month of sale, and the remaining 53 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. In March 2013, credit sales were $387,000 and credit purchases were $279,500. What is the ending cash balance for April if the beginning cash balance was $97,500? A. $87,410 B. $90,060 C. $92,800 D. $94,440 E. $97,230
B. $90,060
Cromwell's Interiors is considering a project that is equally as risky as the firm's current operations. The firm has a cost of equity of 13.7 percent and a pretax cost of debt of 8.4 percent. The debt-equity ratio is .65 and the tax rate is 40 percent. What is the cost of capital for this project? A. 9.97 percent B. 10.29 percent C. 11.38 percent D. 11.62 percent E. 12.30 percent
B. 10.29 percent
Musical Charts just paid an annual dividend of $2.45 per share. This dividend is expected to increase by 3.3 percent annually. Currently, the firm has a beta of 1.09 and a stock price of $36 a share. The risk-free rate is 4.2 percent and the market rate of return is 12.6 percent. What is the cost of equity capital for this firm? A. 10.28 percent B. 11.84 percent C. 12.29 percent D. 12.95 percent E. 13.42 percent
B. 11.84 percent
Lacey's has an average collection period of 32 days and factors all of its receivables immediately at a 1.1 percent discount. Assume all accounts are collected in full. What is the firm's effective cost of borrowing? A. 13.38 percent B. 13.45 percent C. 13.57 percent D. 13.63 percent E. 13.88 percent
B. 13.45 percent
Consider the following financial statement information for Kirkwood United. Assume all sales are on credit. How long is the cash cycle? A. 28.21 days B. 33.25 days C. 51.03 days D. 51.58 days E. 53.57 days
B. 33.25 days
The Green Balloon just paid its first annual dividend of $0.12 a share. The firm plans to increase the dividend by 3.5 percent per year indefinitely. What is the firm's cost of equity if the current stock price is $6.50 a share? A. 5.35 percent B. 5.41 percent C. 14.42 percent D. 18.79 percent E. 19.98 percent
B. 5.41 percent
Traditional Bank has an issue of preferred stock with a $4.80 stated dividend that just sold for $80 a share. What is the bank's cost of preferred stock? A. 5.91 percent B. 6.00 percent C. 6.23 percent D. 6.47 percent E. 7.32 percent
B. 6.00 percent
Which one of the following statements is correct? A. An increase in the market value of preferred stock will increase a firm's weighted average cost of capital. B. The cost of preferred stock is unaffected by the issuer's tax rate. C. Preferred stock is generally the cheapest source of capital for a firm. D. The cost of preferred stock remains constant from year to year. E. Preferred stock is valued using the capital asset pricing model.
B. The cost of preferred stock is unaffected by the issuer's tax rate.
Scenario analysis asks questions such as: A. How will changing the number of units sold affect the outcome of this project? B. What is the best outcome that should reasonably be expected? C. How much will a $1 increase in the variable cost per unit change the net present value? D. Will the net present value increase or decrease if the quantity sold increases by 100 units? E. How will the operating cash flow change if the depreciation method is changed?
B. What is the best outcome that should reasonably be expected?
You are analyzing a project and have developed the following estimates. The depreciation is $7,600 a year and the tax rate is 34 percent. What is the worst-case operating cash flow? A. -$1,311 B. -$641 C. $274 D. $599 E. $1,206
C. $274
The Green Tomato purchased a parcel of land six years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $355,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land? A. $0 B. $299,500 C. $355,000 D. $363,500 E. $419,000
C. $355,000
Classic Cars is considering a project that requires $148,000 of fixed assets that are classified as five-year property for MACRS. What is the book value of these assets at the end of year 3? The MACRS allowance percentages are as follows, commencing with year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent. A. $34,210 B. $36,667 C. $42,624 D. $43,450 E. $44,504
C. $42,624
A project has an annual operating cash flow of $45,000. Initially, this four-year project required $3,800 in net working capital, which is recoverable when the project ends. The firm also spent $21,500 on equipment to start the project. This equipment will have a book value of $4,300 at the end of year 4. What is the cash flow for year 4 of the project if the equipment can be sold for $5,400 and the tax rate is 34 percent? A. $51,724 B. $52,038 C. $53,826 D. $53,862,900 E. $53,900
C. $53,826
British Motor Works is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $67,000 in additional current assets and $32,000 in additional current liabilities. The firm also estimates the project will require an additional $7,000 a year in current assets for each one of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured? A. -$85,000 B. $25,000 C. $63,000 D. $68,000 E. $85,000
C. $63,000
Country Kitchen's cost of equity is 15.3 percent and its aftertax cost of debt is 6.9 percent. What is the firm's weighted average cost of capital if its debt-equity ratio is 0.58 and the tax rate is 30 percent? A. 8.94 percent B. 11.47 percent C. 12.21 percent D. 12.28 percent E. 13.01 percent
C. 12.21 percent
The 7.5 percent preferred stock of Rock Bottom Floors is selling for $60 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100? A. 7.50 percent B. 8.13 percent C. 12.50 percent D. 13.79 percent E. 14.14 percent
C. 12.50 percent
All else held constant, which one of the following statements is correct concerning the accounts payable period? A. The accounts payable period is equal to 365/(Sales/Average accounts payable). B. A decrease in the accounts payable period will increase the operating cycle. C. An increase in the accounts payable period will decrease the cash cycle. D. A decrease in the accounts payable period will decrease the operating cycle. E. An increase in the accounts payable turnover rate decreases the cash cycle.
C. An increase in the accounts payable period will decrease the cash cycle.
Which one of the following will affect the capital structure weights used to compute a firm's weighted average cost of capital? A. Decrease in the book value of a firm's equity B. Decrease in a firm's tax rate C. Increase in the market value of the firm's common stock D. Increase in the market risk premium E. Increase in the firm's beta
C. Increase in the market value of the firm's common stock
You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $56, variable cost per unit = $39, fixed costs = $24,700. The depreciation is $15,800 a year and the tax rate is 35 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow? A. -$2,600 B. -$1,742 C. -$912 D. $1,690 E. $2,600
D. $1,690
Which one of the following can occur if the operating cycle decreases while both the accounts receivable and the accounts payable periods remain constant? A. Inventory period remains constant B. Cash cycle increases C. Inventory turnover rate increases D. Accounts receivable turnover rate increases E. Cash cycle remains constant
C. Inventory turnover rate increases
Which one of the following industries is most apt to have the shortest operating cycle? A. Toy store B. Car manufacturer C. Local restaurant D. Furniture store E. Plastics manufacturer
C. Local restaurant
Which one of the following is most apt to cause a wise manager to increase a project's cost of capital? Assume the firm is levered. A. Management decides to issue new stock to finance the project. B. The initial cash outlay requirement is reduced. C. She learns the project is riskier than previously believed. D. The aftertax cost of debt just decreased. E. The project's life is shortened.
C. She learns the project is riskier than previously believed
A firm has a return on equity of 12.4 percent according to the dividend growth model and a return of 18.7 percent according to the capital asset pricing model. The market rate of return is 13.5 percent. What rate should the firm use as the cost of equity when computing the firm's weighted average cost of capital (WACC)? A. 12.4 percent because it is lower than 18.7 percent B. 18.7 percent because it is higher than 12.4 percent C. The arithmetic average of 12.4 percent and 18.7 percent D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7 percent E. 13.5 percent
C. The arithmetic average of 12.4 percent and 18.7 percent
A debt-free firm has net income of $228,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow? A. $182,200 B. $103,500 C. $107,100 D. $249,700 E. $295,900
D. $249,700
A project has annual depreciation of $16,200, costs of $87,100, and sales of $123,000. The applicable tax rate is 40 percent. What is the operating cash flow according to the tax shield approach? A. $21,540 B. $27,667 C. $27,458 D. $28,020 E. $29,878
D. $28,020
Abbott & Costello has the following estimated sales. Purchases are equal to 75 percent of the following quarter's sales. What is the estimated amount of purchases for quarter 2? A. $5,209 B. $5,508 C. $5,848 D. $7,125 E. $7,720
D. $7,125
Tim's Tools just issued a dividend of $1.80 per share on its common stock. The company is expected to maintain a constant 4 percent growth rate in its dividends indefinitely. If the stock sells for $31 a share, what is the company's cost of equity? A. 8.81 percent B. 9.37 percent C. 9.94 percent D. 10.04 percent E. 10.46 percent
D. 10.04 percent
Piedmont Hotels is an all-equity firm with 60,000 shares of stock outstanding. The stock has a beta of 1.27 and a standard deviation of 13.8 percent. The market risk premium is 9.1 percent and the risk-free rate of return is 4.5 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 1 percent to the project's discount rate. What should the firm set as the required rate of return for the project? A. 12.54 percent B. 13.92 percent C. 15.39 percent D. 17.06 percent E. 17.33 percent
D. 17.06 percent
Appalachian Mountain Goods has paid increasing dividends of $.0.12, $0.18, $0.20, and $0.25 a share over the past four years, respectively. The firm estimates that future increases in its dividends will be equal to the arithmetic average growth rate over these past four years. The stock is currently selling for $12.60 a share. The risk-free rate is 3.2 percent and the market risk premium is 9.1 percent. What is the cost of equity for this firm if its beta is 1.26? A. 14.34 percent B. 16.91 percent C. 19.78 percent D. 22.96 percent E. 24.03 percent
D. 22.96 percent
Kim's Bridal Shoppe has 15,000 shares of common stock outstanding at a price of $11 a share. It also has 2,000 shares of preferred stock outstanding at a price of $34 a share. There are 50 bonds outstanding that have a 7.5 percent semiannual coupon. The bonds mature in six years, have a face value of $1,000, and sell at 96 percent of par. What is the capital structure weight of the common stock? A. 24.20 percent B. 31.68 percent C. 53.15 percent D. 58.72 percent E. 66.23 percent
D. 58.72 percent
Wage Garnishers, Inc. has sales for the year of $50,300 and cost of goods sold of $23,700. The firm carries an average inventory of $4,800 and has an average accounts payable balance of $4,400. What is the inventory period? A. 12.39 days B. 18.68 days C. 31.29 days D. 73.92 days E. 81.36 days
D. 73.92 days
Which one of the following statements is true, all else constant? A. A decrease in the accounts receivable turnover rate decreases the cash cycle. B. Paying a supplier within the discount period, rather than waiting until the end of the normal credit period, will decrease the cash cycle. C. The cash cycle can never be negative. D. An increase in the inventory turnover rate will decrease the cash cycle. E. The payables period must be shorter than the receivables period.
D. An increase in the inventory turnover rate will decrease the cash cycle.
Which one of the following will increase the operating cycle? A. Decreasing the accounts payable period B. Increasing the accounts payable turnover rate C. Increasing the cash cycle D. Decreasing the accounts receivable turnover rate E. Decreasing the inventory period
D. Decreasing the accounts receivable turnover rate
You need to use the pure play approach to assign a cost of capital to a proposed investment. Which one of the following characteristics should you most concentrate on as you search for an appropriate pure play firm? A. Firm size B. Firm location C. Firm experience D. Firm operations E. Firm management
D. Firm operations
Which one of the following statements is correct concerning capital structure weights? A. Target rates are less relevant to a project than are historical rates. B. The weights are unaffected when a bond issue matures. C. An increase in the debt-equity ratio will increase the weight of the common stock. D. The repurchase of preferred stock will increase the weight of debt. E. The issuance of additional shares of common stock will increase the weight of the preferred stock.
D. The repurchase of preferred stock will increase the weight of debt.
The accounts receivable period is the time that elapses between the _____ and the ____. A. purchase of inventory; payment to the supplier B. purchase of inventory; collection of the receivable C. sale of inventory; payment to supplier D. sale of inventory; collection of the receivable E. sale of inventory: billing to customer
D. sale of inventory; collection of the receivable
Erin's purchases from suppliers in a quarter are equal to 67 percent of the next quarter's forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 30 percent of sales, and interest and dividends are $90 per quarter. No capital expenditures are planned. Projected quarterly sales are: Sales for the first quarter of the following year are projected at $1,510. What is the amount of the firm's total cash outlay for the third quarter? A. $1,990 B. $1,420 C. $1,480 D. $1,530 E. $1,550
E. $1,550
You are analyzing a project and have developed the following estimates. The depreciation is $3,200 a year and the tax rate is 34 percent. What is the best-case operating cash flow? A. $13,473 B. $14,196 C. $15,280 D. $16,701 E. $17,423
E. $17,423
The Candy Cane Store has the following estimated sales. Purchases are equal to 64 percent of the following quarter's sales. Assume each month has 30 days, the accounts receivable period is 30 days and the accounts payable period is 45 days. How much will the firm pay its suppliers in the third quarter? A. $16,379 B. $16,811 C. $18,514 D. $20,947 E. $21,920
E. $21,920
A cost-cutting project will decrease costs by $58,500 a year. The annual depreciation on the project's fixed assets will be $10,300 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A. $24,552 B. $26,791 C. $25,805 D. $38,610 E. $42,112
E. $42,112
You are analyzing a project and have developed the following estimates. The depreciation is $52,000 a year and the tax rate is 34 percent. What is the worst-case operating cash flow? A. -$32,509 B. -$19,288 C. -$4,225 D. $27,556 E. $48,106
E. $48,106
Kurt, who is a divisional manager, continually brags that his division's required return for its projects is 1 percent lower than the return required for any other division of the firm. Which one of the following most likely contributes the most to the lower rate requirement for Kurt's division? A. Kurt tends to overestimate the projected cash inflows on his projects. B. Kurt tends to underestimate the variable costs of his projects. C. Kurt has the most efficiently managed division. D. Kurt's division is less risky than the other divisions. E. Kurt's projects are generally financed with debt while the other divisions' projects are financed with equity.
D. Kurt's division is less risky than the other divisions.
Which one of the following commences on the day inventory is purchased and ends on the day the payment for that inventory is collected? Assume all sales and purchases are on credit. A. Inventory period B. Accounts receivable period C. Accounts payable period D. Operating cycle E. Cash cycle
D. Operating cycle
Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent? A. $11,309 B. $11,628 C. $12,737 D. $14,439 E. $14,901
D. $14,439
Which one of the following statements is correct? A. Firms should generally finance all of their assets with long-term debt. B. Firms that follow restrictive financial policies can generally avoid short-term debt financing. C. Short-term borrowing is generally more expensive than long-term borrowing. D. Long-term interest rates tend to be more volatile than short-term rates. E. A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
E. A firm is less apt to face financial distress if it adopts a flexible financial policy rather than a restrictive policy.
Which one of the following activities is a source of cash? A. Decreasing long-term debt B. Increasing inventory C. Repurchasing shares of stock D. Increasing fixed assets E. Decreasing accounts receivable
E. Decreasing accounts receivable
Which of the following have the potential to increase the net present value of a proposed investment? I. Ability to immediately shut down a project should the project become unprofitable II. Ability to wait until the economy improves before making the investment III. Option to place the investment on hold until a more favorable discount rate becomes available IV. Option to increase production beyond that initially projected A. I only B. I and IV only C. II and III only D. I, II, and IV only E. I, II, III, and IV
E. I, II, III, and IV
In an efficient market, the cost of equity for a risky firm does which one of the following according to the security market line? A. Produces a return that will be less than the market rate but higher than the risk-free rate B. Equals the market rate of return for all stocks C. Has a maximum cost equal to the market rate of return D. Decreases as the beta of the firm's stock increases E. Increases in direct relation to the stock's systematic risk
E. Increases in direct relation to the stock's systematic risk
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? A. Fixed B. Forgotten C. Variable D. Opportunity E. Sunk
E. Sunk
Accounts receivable financing is the term used to describe which of the following types of loans that involve either the assignment or the factoring of a firm's accounts receivable? A. Secured short-term loan B. Unsecured short-term loan C. Secured long-term loan D. Unsecured long-term loan E. Trust receipt loan
A. Secured short-term loan
Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Benefit-cost analysis E. Opportunity cost analysis
A. Sensitivity analysis
Casper's is analyzing a proposed expansion project that is much riskier than the firm's current operations. Thus, the project will be assigned a discount rate equal to the firm's cost of capital plus 3 percent. The proposed project has an initial cost of $17.2 million that will be depreciated on a straight-line basis over 20 years. The project also requires additional inventory of $687,000 over the project's life. Management estimates the facility will generate cash inflows of $2.78 million a year over its 20-year life. After 20 years, the company plans to sell the facility for an estimated $1.3 million. The company has 60,000 shares of common stock outstanding at a market price of $49 a share. This stock just paid an annual dividend of $1.84 a share. The dividend is expected to increase by 3.5 percent annually. The firm also has 10,000 shares of 12 percent preferred stock with a market value of $98 a share. The preferred stock has a par value of $100. The company has a 9 percent, semiannual coupon bond issue outstanding with a total face value of $1.1 million. The bonds are currently priced at 102 percent of face value and mature in 16 years. The tax rate is 33 percent. Should the firm pursue the expansion project at this point in time? Why or why not? A. Accept; the NPV is $2.648 million. B. Accept; the NPV is $4.507 million. C. Reject; the NPV is -$3.241 million. D. Reject; the NPV is -$3.027 million. E. Reject; the NPV is -$1.040 million.
B. Accept; the NPV is $4.507 million.
The ability to delay an investment: A. is commonly referred to as the best-case scenario. B. is valuable provided there are conditions under which the investment will have a positive net present value. C. ensures that the investment will have an expected net present value that is positive. D. offsets the need to conduct sensitivity analysis. E. is referred to as the option to abandon
B. is valuable provided there are conditions under which the investment will have a positive net present value.
The opportunities that a manager has to modify a project once it has started are called: A. sensitivity choices. B. managerial options. C. scenario adjustments. D. restructuring options. E. erosion control measures.
B. managerial options
Captain Kurt's Enterprises has a receivables turnover rate of 12.8, a payables turnover rate of 11.9, and an inventory turnover rate of 15.6. What is the length of the firm's operating cycle? A. 24.89 days B. 39.80 days C. 51.92 days D. 62.56 days E. 83.77 days
C. 51.92 days
International Exchange has three divisions: A, B, and C. Division A has the least risk and Division C has the most risk. The firm has an aftertax cost of debt of 6.1 percent and a cost of equity of 14.3 percent. The firm is financed with 35 percent debt and 65 percent equity. Division A's projects are assigned a discount rate that is 3 percent less than the firm's weighted average cost of capital. What is the discount rate applicable to Division A? A. 7.98 percent B. 8.27 percent C. 8.44 percent D. 9.48 percent E. 13.43 percent
C. 8.44 percent
Dexter Companies has a conventional factoring arrangement with its local bank. Which one of the following would be a common characteristic of that type of financing arrangement? A. Dexter Companies will receive the full amount of the accounts receivable included in this arrangement on an agreed upon date sometime in the future. B. The responsibility for collecting the covered receivables lies with Dexter Companies. C. Any bad debt that results from an account receivable included in this arrangement will be a cost to the bank. D. Dexter Companies will pay a monthly fee to the bank and in turn will receive payment for the full amount of its accounts receivable. E. The arrangement keeps the receivables as an asset of Dexter Companies but places a lien on those accounts in favor of the lending bank.
C. Any bad debt that results from an account receivable included in this arrangement will be a cost to the bank.
The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased eight years ago for $689,000. Over the past eight years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project? A. Initial cost of the building B. Cost of the remodeling C. Current market value of the building D. Initial cost of the building plus the remodeling costs E. Current market value of the building plus the remodeling costs
C. Current market value of the building
Suppose that Martin Metal Products changes its policy and starts requiring all of its customers to pay within 20 days rather than the 30 days that it currently allows. Which one of the following will result from this change? A. Increase in receivables period B. Increase in inventory period C. Decrease in cash cycle D. Increase in operating cycle E. Increase in accounts payable period
C. Decrease in cash cycle
Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept? A. None of these options B. Fabric and quilting only C. Exclusive gifts only D. Exclusive gifts and decorator items only E. All three options
C. Exclusive gifts only
Tri-City Grocers is a chain of grocery stores that just hired a new CFO. Which of the following actions would you expect this CFO to adopt given her statement that she wants to implement a more flexible financing policy for the firm? I. easing the credit terms given to customers II. increasing the amount of inventory carried by each grocery store III. borrowing funds to keep more cash available for store operations IV. decreasing the firms' investments in marketable securities A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV
C. I, II, and III only
Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the: A. depreciation expense for Firm A will be greater than Firm B's expense every year. B. equipment has a higher value on Firm B's books than on Firm A's at the end of year 2. C. operating cash flow of Firm A is less than that of Firm B for year 2. D. market value of Firm A's equipment is greater than the market value of Firm B's equipment. E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.
C. operating cash flow of Firm A is less than that of Firm B for year 2.
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as: A. sensitivity analysis. B. erosion planning. C. scenario analysis. D. benefit planning. E. opportunity evaluation.
C. scenario analysis
Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return. The firm also has 500 bonds outstanding that have a face value of $1,000, a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The firm is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why? A. Accept; the project's NPV is $1.27 million. B. Accept; the NPV is $4.89 million. C. Reject; the NPV is $1.06 million. D. Reject; the NPV -$3.27 million. E. Reject; the NPV is -$5.71 million.
D. Reject; the NPV -$3.27 million.
