Questions to Redo for BEC

Small companies have additional risk with which larger organizations generally do not have to be concerned. These additional risks would include all of the following except that small firms: A. are unable to use broader capital markets. B. are often unable to have diversified operations. C. often have difficulty dealing with increasing interest rates. D. usually have few suppliers.

All of the answer choices could potentially provide risk for a small company; however, interest rate risk affects both small and large organizations. Small firms have problems with various components of the financial risk management process that larger firms can effectively manage. While these problem areas exist for large firms as well, the specific problems facing smaller firms relate to dealing with the problems in a manner consistent with the firm's resource capabilities and include the inability of small firms to: -use broader capital markets because investors in these markets require higher rates of return on what would appear to be riskier investments. -diversify their operations. -have numerous suppliers and/or the clout for logistical ability to purchase from a large number of vendors.

The following selected data pertain to the Darwin Division of Beagle Co. for the current year: Sales $400,000 Operating income 40,000 Capital turnover 4 Imputed interest rate 10% What was Darwin's current-year residual income? A. $0 B. $4,000 Incorrect C. $10,000 D. $30,000 You answered C. The correct answer is D.

Capital turnover = Sales / Invested capital 4 = $400,000 / Invested capital 4 x Invested capital= $400,000 Invested capital= $400,000 / 4 = $100,000 Operating income $40,000 Less imputed interest on invested capital (10% x $100,000) 10,000 ------- Equals residual income $30,000

A company has an outstanding 1-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan? A. 8% B. 10% C. 20% D. 28%

Compensating balances increase the cost of the loan due to the fact that fewer funds are available for use. The effective interest rate for a loan requiring a compensating balance for which the company would not otherwise hold such funds would be the actual interest paid divided by the funds available for use. In this case: Full amount of loan $500,000 Stated interest rate 8% Compensating balance ($500,000 x 0.20) $100,000 Annual interest expense ($500,000 x 0.08) $ 40,000 The effective interest rate for the loan requiring a compensating balance would be: Annual interest expense ÷ (Full loan amount - Compensating balance) = $40,000 ÷ ($500,000 - $100,000) = 0.10 (10%)

In year 1, a large domestic manufacturer produces all of its motors domestically and sells them internationally. The company's management team is in the process of developing its year 2 budget, and copper costs represent a significant line item in the budget. In year 1, the company spent $1,000,000 in purchasing 250,000 pounds of copper. Economic data indicate that in year 1 copper costs had a price index of 120.0, and expectations are that the index will increase to 126.0 in year 2. Management anticipates a 5% increase in copper usage for year 2. What amount represents the year 2 budget for copper purchases? A. $1,000,000 B. $1,050,000 C. $1,102,500 D. $1,300,000

Copper purchases in year 2 will increase due to two factors: inflation in the cost of copper, and an increase in the actual usage of copper (i.e., quantity needed). To adjust for changes in price, the following formula is used: Cost in year 1 × Change in price index: $1,000,000 × (126 ÷ 120) = $1,050,000 The second step is to adjust for increased demand: $1,050,000 × 1.05 = $1,102,500

In year 1, a large domestic manufacturer produces all of its motors domestically and sells them internationally. The company's management team is in the process of developing its year 2 budget, and copper costs represent a significant line item in the budget. In year 1, the company spent $1,000,000 in purchasing 250,000 pounds of copper. Economic data indicate that in year 1 copper costs had a price index of 120.0, and expectations are that the index will increase to 126.0 in year 2. Management anticipates a 5% increase in copper usage for year 2. What amount represents the year 2 budget for copper purchases? A. $1,000,000 Incorrect B. $1,050,000 C. $1,102,500 D. $1,300,000

Copper purchases in year 2 will increase due to two factors: inflation in the cost of copper, and an increase in the actual usage of copper (i.e., quantity needed). To adjust for changes in price, the following formula is used: Cost in year 1 × Change in price index: $1,000,000 × (126 ÷ 120) = $1,050,000 The second step is to adjust for increased demand: $1,050,000 × 1.05 = $1,102,500 Another way to calculate it is: $1,000,000 x 126/120 price increase x 1.05 increase usage

In the past, four direct labor hours were required to produce each unit of product Y. Material costs were $200 per unit, the direct labor rate was $20 per hour, and factory overhead was three times direct labor cost. In budgeting for next year, management is planning to outsource some manufacturing activities and to further automate others. Management estimates these plans will reduce labor hours by 25%, increase the factory overhead rate to 3.6 times direct labor costs, and increase material costs by $30 per unit. Management plans to manufacture 10,000 units. What amount should management budget for cost of goods manufactured? A. $4,820,000 Correct B. $5,060,000 C. $5,200,000 D. $6,500,000

Cost of goods manufactured is composed of the product costs called direct materials, direct labor, and overhead. The direct materials cost is (Old cost + Expected increase in cost) × Number of units. ($200 (Old cost) + $30 (Increase expected)) × 10,000 = $2,300,000 The direct labor cost is (Old cost - Expected decrease in cost) × Number of units. Old cost = Labor hours required × Hourly rate = 4 × $20 = $80 (per unit) Expected decrease in cost = $80 × 25% = $20 ($80 (Old cost) - $20 (Decrease expected)) × 10,000 = $600,000 The factory overhead is expected to be 3.6 × Direct labor cost per unit × Number of units. New direct labor cost per unit is $80 (Old cost) - $20 (Expected decrease) = $60 per unit 3.6 × $60 (Labor cost) = $216 per unit for overhead × 10,000 units = $2,160,000 Direct materials + Direct labor + Factory overhead = Total cost $2,300,000 + $600,000 + $2,160,000 = $5,060,000

Information related to the financial transactions for a country is given as follows with values stated in billions of dollars. -- Gross domestic product (GDP) $4,000 -- Transfer payments 500 -- Corporate income taxes 50 -- Social Security contributions 200 -- Indirect business taxes 210 -- Personal income taxes 250 -- Undistributed corporate profits 25 -- Depreciation 500 -- Net income earned abroad for the country 0 Disposable income is: A. $3,500. B. $3,290. C. $4,500. D. $3,265.

Disposable income is that income received by individuals which is available for consumption and saving (i.e., personal income minus personal income taxes). The example below demonstrates the calculation of disposable income: Gross domestic product (GDP) $4,000 - Depreciation (500) ------- = Net domestic product (NDP)(at mkt cost) $3,500 - Indirect business taxes (210) ------- = Net national income (NNI) (at factor cost) $3,290 - Corporate income taxes ( 50) - Undistributed corporate profits ( 25) - Social Security contributions (200) + Transfer payments 500 ------- = PERSONAL INCOME $3,515 - Personal income taxes (250) ------- = DISPOSABLE INCOME $3,265 =======

A company uses process costing to assign product costs. Available inventory information for a period is as follows: Inventory Material Conversion (in Units) Cost Cost ---------- ------- ---------- Beginning 0 Started during the period 15,000 $75,000 $55,500 Transferred out 13,500 End of period 1,500 The ending inventory was 25% complete as to the conversion cost. 100% of direct material was added at the beginning of the process. What was the total cost transferred out? A. $130,500 B. $126,973 C. $121,500 D. $117,450

Equivalent units (EU) for material were 15,000 (including 13,500 in units completed and 1,500 in ending work in process). The equivalent units of conversion cost in ending inventory equaled 1,500 units times 25%, or 375. Adding the 375 equivalent units in ending inventory to the 13,500 units completed gives 13,875 total equivalent units of conversion cost. Dividing $75,000 of material cost by 15,000 EU for material gives $5 as the unit cost for material. Dividing conversion cost of $55,500 by 13,875 EU for conversion cost gives $4 as unit cost for conversion costs. Adding the $5 to the $4 gives $9 as total cost per unit completed. Multiplying the 13,500 units completed by $9 gives total cost transferred out of $121,500.

Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a $60,000 market value. An unprotected crop subject to frost has an expected market value of $40,000. If Cal protects the strawberries against frost, then the market value of the crop is still expected to be $60,000 under frost-free conditions and $90,000 if there is a frost. What must be the probability of a frost for Cal to be indifferent to spending $10,000 for frost protection? A. .167 Correct B. .200 C. .250 D. .333

Expected market value when protected with a frost $90,000 Less expected market value when not protected with a frost 40,000 ------- Change in EMV resulting when protected from frost $50,000 At Cal's indifference point: Cost of protection = Probability of frost x Change in EMV $10,000 = Probability of frost x $50,000 $10,000 / $50,000 = Probability of frost .200 = Probability of frost = 20% Proof: Protection No Protection ----------------- ------------- Frost $90,000 $40,000 No Frost $60,000 $60,000 Probable Value of Crop Frost .20 $18,000 $ 8,000 No Frost .80 48,000 48,000 ------- ------- $66,000 $56,000 Cost of Protection (10,000) 0 ------- ------- Net Value $56,000 $56,000 ======= =======

Datacomp Industries, which has no current debt and has a beta of .95 for its common stock. Management 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? A. No, because the cost of equity capital will increase B. Yes, because the cost of equity capital will decrease C. Yes, because the weighted average cost of capital will decrease D. No, because the weighted average cost of capital will increase

In the current situation, the weighted average cost of capital (WACC) is equal to the cost of equity due to the fact that no debt exists in the capital structure; therefore, the WACC is 16% (the expected return on equity). If the capital structure changes to 30% debt with an after-tax cost of debt of 7.5%, then the WACC will decrease even if there is a small increase in the cost of equity due to an increase in the beta associated with the stock of the firm, since 30% of the financing of the company now has a 7.5% cost. Management's focus should be to finance the company for the lowest cost on average. The cost of one element of the capital structure (debt, preferred stock, or common stock) is not significant in the decision-making process. Management's focus needs to be on the WACC. A key to this problem from a mathematical point of view is understanding the use of the capital asset pricing model (CAPM), whose formula is shown below: Required rate of return for equity = Risk-free rate + beta(LT average risk premium for the market - Risk-free rate) Step 1: In this problem, the following original facts are known: Expected return for equity = 16% Risk-free rate = 6% beta = .95 Substituting the known items in the CAPM equation, the LT average risk premium for the market can be determined: Required rate of return for equity = Risk-free rate + beta(LT average risk premium for the market - Risk-free rate) 16% = 6% + .95(LT average risk premium for the market - 6%) LT average risk premium for the market = 16.5% Step 2: The proposed change to 30% debt and 70% equity provides the following known information: LT average risk premium for the market = 16.5% Risk-free rate = 6% beta = 1.05 The new required rate of return for equity can now be calculated as: Required rate of return for equity = Risk-free rate + beta(LT average risk premium for the market - Risk-free rate) Required rate of return for equity = 6% +1.05(16.5% - 6%) Required rate of return for equity = 17.0% Step 3: The WACC of capital under the proposed capital structure can then be calculated as: Proposed WACC = Weighted cost of debt + Weighted cost of equity = (30% x 7.5%) + (70% x 17.0%) = 2.3% + 11.9% = 14.2% Comparison of the current structure and the proposed structure: Current Proposed Structure Structure ---------- --------- Cost of debt 7.5% Cost of equity 16.0% 17.0% WACC 16.0% 14.2%

The following information is taken from Wampler Co.'s contribution income statement: Sales $200,000 Contribution margin 120,000 Fixed costs 90,000 Income taxes 12,000 What was Wampler's margin of safety? Correct A. $50,000 B. $150,000 C. $168,000 D. $182,000

Margin of safety is the excess of actual or budgeted sales over breakeven point sales. It is the amount by which sales could decrease before losses occur. At breakeven there would be no income tax, so we can ignore the income tax information. To find breakeven sales, first find the contribution margin ratio (contribution margin divided by sales) of $120,000 ÷ $200,000, or 60%. Then divide fixed costs by the contribution margin ratio ($90,000 ÷ 0.6 = $150,000 breakeven sales). The margin of safety is the current sales ($200,000) less breakeven sales ($150,000), or $50,000.

A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company's residual income would be which of the following amounts? A. $0 B. $260 Correct C. $640 D. $900

Residual income is the amount of net income in excess of a minimum desired rate of return on invested capital. This can be expressed in the equation: Reported net income - (Desired rate of return × Invested capital). For Division A, the residual income is: $500 - (.10 × $1,000) = $400 For Division B, the residual income is: $400 - (.10 × $1,600) = $240 Total residual income for the company is: $400 + $240 = $640

The following were among Gage Co.'s current-year costs: Normal spoilage $ 5,000 Freight in 10,000 Excess of actual manufacturing costs over standard costs 20,000 Standard manufacturing costs 100,000 Actual prime manufacturing costs 80,000 What was Gage's current-year actual manufacturing overhead? A. $40,000 B. $45,000 C. $55,000 D. $120,000

Standard manufacturing costs $100,000 + Excess of actual manufacturing costs over standard costs 20,000 -------- = Total actual manufacturing costs $120,000 - Actual prime manufacturing costs 80,000 -------- = Actual manufacturing overhead $ 40,000 ========

Jonathan Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows: Direct labor hours 21,000 Direct labor costs $110,000 Machine hours 35,000 For a particular job, 1,500 direct-labor hours were used. Using direct-labor hours as the cost driver, what amount of overhead should be applied to this job? A. $3,214 Incorrect B. $5,357 C. $5,625 D. $7,500

The amount of overhead charged to a job is determined by multiplying the total overhead by an overhead rate. The overhead rate in this problem is determined by the cost driver of direct labor hours. The solution involves looking at the direct labor hours used as a percentage of total budgeted direct labor hours. Apply this result to the budgeted overhead to allocate the same proportion of overhead to the job. In this case, the overhead can be found by: Direct labor hours used on job Overhead charged = ------------------ x Total budgeted overhead to the job Estimated total direct labor hours Direct labor hours used = 1,500 Estimated total direct labor hours = 20,000 Total budgeted overhead = Variable ($50,000) + Fixed ($25,000) = $75,000 1,500 Overhead = -------- x $75,000 20,000 Overhead = .075 x $75,000 = $5,625

A banking system with a reserve ratio of 20% and a change in reserves of $1 million can increase its total demand deposits by: A. $200,000. B. $5 million. C. $1 million. D. $800,000.

The banking system can increase its total demand deposits by $5 million, computed as follows: If reserves increase by $1 million and the reserve ratio is 20%, and Reserve ratio = Reserves / Total Demand Deposits, then 0.20 = 1,000,000 / increase in deposits. Thus, the increase in deposits = $1,000,000 / 0.20, or $5,000,000.

A ceramics manufacturer sold cups last year for $7.50 each. Variable costs of manufacturing were $2.25 per unit. The company needed to sell 20,000 cups to break even. Net income was $5,040. This year, the company expects the price per cup to be $9.00, variable manufacturing costs to increase 33.3%, and fixed costs to increase 10%. How many cups (rounded) does the company need to sell this year to break even? A. 17,111 B. 17,500 C. 19,250 D. 25,667

The breakeven point is where total revenue equals total cost. Another way to express this specific condition is that contribution margin equals fixed costs. In order to solve this problem, the following items must be determined: Revenue per unit (P) Variable cost per unit (V) Total fixed costs (FC) Projected revenue per unit is given in the problem as $9.00 per unit. Projected variable costs are as follows: Prior variable cost per unit x (1 + 33.33)% = $2.25 per unit x 1.3333 = $3.00 per unit Total fixed costs were not given directly in the problem; however, they can be determined by first calculating the fixed costs for the prior year. Last year, the company needed to sell 20,000 cups in order to break even; therefore: Last year's fixed costs = 20,000 units x ($7.50 - $2.25) = $105,000 The projected fixed costs are 10% more than the prior year. Projected fixed costs = $105,000 x 1.10 = $115,500 Breakeven in units = FC ÷ (P - V) = $115,500 ÷ ($9 - $3) = 19,250 units

Asta, Inc., is a medical laboratory that performs tests for physicians. Asta anticipates performing between 5,000 and 12,000 tests during the month of April. Compared to industry averages, at the low range of activity Asta has a lower sales price per test, higher fixed costs, and the same breakeven point in number of tests performed. At the high range of activity, Asta's sales price per test and fixed costs are the same as industry averages, and Asta's variable costs are lower. At the low range of activity (0 to 4,999 tests performed) fixed costs are $160,000. At the high range of activity (5,000 to 14,999 tests performed) fixed costs are $200,000. Sales price per test $60 Variable costs per test 20 What is Asta's breakeven point in number of tests at the low activity range? A. 4,000 B. 5,000 C. 8,000 D. 9,000

The contribution margin per test is sales price less variable cost, or $40 ($60 - $20). At low activity with fixed costs of $160,000, the breakeven point is fixed costs divided by unit contribution margin, or $160,000 ÷ $40 = 4,000 tests.

Capital budgeting is generally most accurate when the method used considers the cost of capital, as in the net present value method. The cost of capital used in this analysis should be ________ weighted average cost of capital. A. historic B. industry-wide C. marginal D. total

The cost of capital used should be the weighted average cost of capital in a marginal sense rather than a historical sense. In other words, the cost of capital should be determined in terms of the cost to issue debt and equity in the current market environment and not based on book value. The weights should be based on the expected capital structure of the funds to be raised.

One United States dollar is being quoted at 120 Japanese yen on the spot market and at 123 Japanese yen on the 90-day forward market, hence the annual effect in the forward market is the: A. United States dollar is at a premium of 10%. B. United States dollar is at a premium of 2.5%. C. United States dollar is at a discount of 10%. D. Japanese yen is at a discount of 2.5%.

The difference between the spot market and 90-day forward market price of a dollar in terms of yen, is 3 yen. Over a 360-day year, this 90-day difference of 3 yen translates into 12 yen, which is 10% of the spot market quote of 120 yen. The forward market quote is higher than that in the spot market, hence it is expected that the dollar will appreciate, and the U.S. dollar is at a premium of 10%.

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%. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis? A. $27,000 B. $12,000 C. $(18,000) D. $(30,000)

The key to solving this problem is separating the cash flow items from the noncash items. The $40,000 cost to remove the asset is a cash outflow. The scrap salvage value of $10,000 is a cash inflow. Both of these items are also part of the net income upon which tax must be computed. The $75,000 loss that will result from the disposal is also part of the net income upon which tax must be computed. However, the loss is not a cash outflow. What is a cash flow is the tax or tax savings in the net income or loss. The "end-of-life" cash flow may be calculated as follows: Outflow: Cost to remove ($ 40,000) Inflow: Salvage value $ 10,000 Inflow: Tax savings from net loss $ 42,000 * ---------- Net cash inflow $ 12,000 * The tax savings is calculated on a net loss of $105,000. The loss is a result of the $65,000 tax loss on the asset disposal ($75,000 tax basis offset by $10,000 scrap value) and the $40,000 cost to remove the asset.

A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor usage variance? A. $25,000 favorable Incorrect B. $25,000 unfavorable C. $30,000 favorable D. $30,000 unfavorable

The labor efficiency (usage) variance is the difference between standard cost of actual hours and the standard cost of the budgeted labor hours. Standard cost (at $15 per hour) of the actual hours of 3,000 hours was $45,000. Standard cost (at $15 per hour) of the standard hours (0.5 hours × 10,000 widgets) was $15 × 5,000 hours, or $75,000. Since the actual cost was less than the budgeted cost ($45,000 - $75,000), the labor efficiency (usage) variance was $30,000 favorable.

Given that demand exceeds capacity, that there is no spoilage or waste, and that there is full utilization of a constant number of assembly hours, the number of components needed for an assembly operation with an 80% learning curve should: increase for successive periods. decrease per unit of output. A. I only B. II only C. Both I and II D. Neither I nor II

The learning curve is a graphical description of the learning process that shows the impacts of learning over a number of practice opportunities on work behaviors. The learning curve usually shows increases in work performance as an employee integrates learning experiences (classes, on-the-job training, etc.) into work practices. A basic assumption of the learning curve model is that the direct labor required for the n + 1st unit will always be less than the labor required for the n unit. Since demand exceeds supply, the company will keep increasing production with a constant number of assembly hours. Increased production requires more units of raw material (components).

The following information pertains to Base Manufacturing Co.: Selected Cost Driver Costs ---------------------------------- ---------- Estimated annual overhead $ 900,000 Estimated annual direct labor cost 1,800,000 Actual direct labor cost for March 160,000 Actual overhead for March 90,000 Base Manufacturing Co.'s applied overhead for March is: A. $320,000. B. $75,000. C. $80,000. D. $90,000. You ans

The overhead rate is calculated as follows: Estimated annual overhead ÷ Estimated annual direct labor = Overhead Rate $900,000 ÷ $1,800,000 = 0.50 Therefore, overhead is applied at 50% of actual direct labor cost: $160,000 × 0.50 = $80,000 applied overhead

The price elasticity of demand for a good is 2.0, and the quantity demanded is 5,000 units. The price increases by 10%. What is the new quantity demanded? A. 1,000 B. 4,000 C. 4,500 D. 6,000

The price elasticity of demand is a measure of the responsiveness of consumers to a change in a product's price; price elasticity is equal to the percentage change in quantity demanded divided by the percentage change in price. The law of demand states that there is an inverse relationship between the price and quantity demanded of a product. Therefore, given a 10% increase in price, there would be a 20% decrease in quantity demanded (2.0 = 20% ÷ 10%). The new quantity demanded would be 4,000 units [5,000 - (5,000 × 0.20)].

Martin Corporation Statement of Financial Position December 31, 20X1 (Dollars in millions) Assets Current assets $ 75 Plant and equipment 250 ---- Total assets $325 ==== Liabilities and shareholders' equity Current liabilities $ 46 Long-term debt (12%) 64 Common equity: Common stock, $1 par 10 Additional paid-in capital 100 Retained earnings 105 ---- Total liabilities and shareholders' equity $325 ==== Additional data: The long-term debt was originally issued at par ($1,000/bond) and is currently trading at $1,250 per bond. Martin Corporation can now issue debt at 150 basis points over U.S. Treasury bonds. The current risk-free rate (U.S. Treasury bonds) is 7%. Martin's common stock is currently selling at $32 per share. The expected market return is currently 15%. The beta value for Martin is 1.25. Martin's effective corporate income tax rate is 40%. Martin Corporation's current net cost of debt for issuing new debt is: A. 5.5%. B. 7.0%. C. 5.1%. D. 8.5%.

The problem provides the information that Martin Corporation can now issue debt at 150 basis points over U.S. Treasury bonds and that U.S. Treasury bonds have a current rate of 7%. This means Martin Corporation can now issue debt at 8.5% or 7.0% plus 1.50% (150 basis points). Because interest is tax deductible, the cost of debt is less than the interest rate and equals the interest rate times 1 minus the tax rate. Cost of debt = 8.5% × (1 - .40) = 5.1%.

Three suppliers offer Ruby Co. different credit terms. Bandy Co. offers terms of 1.5/15, net 30. Carryl Co. offers terms of 1/10, net 30. Platt Co. offers terms of 2/10, net 60. Ruby Co. would have to borrow from a bank at an annual rate of 10% to take any cash discounts. Based on a 360-day year, which of the following options would be most attractive for Ruby Co.? A. Purchase from Platt Co., pay in 60 days, and do not borrow from the bank Correct B. Purchase from Bandy Co., pay in 15 days, and borrow from the bank C. Purchase from Carryl Co., pay in 10 days, and borrow from the bank D. Purchase from Bandy Co., pay in 30 days, and do not borrow from the bank

The return percentage from taking a discount equals: 360 × Percentage of Discount Total Credit Period − Discount Period 100% − Percentage of Discount Return percentage for Bandy Co is 36.5%: 360 × 1.5% 30 − 15 100% − 1.5% Return percentage for Carryl Co is 18.2%: 360 × 1% 30 − 10 100% − 1% Return percentage for Platt Co is 14.7%: 360 × 2 60 − 10 98 Ruby Co. should purchase from Bandy Co. and borrow to take advantage of the discount. The return percentage of 36.5% significantly exceeds the 10% interest rate on the bank loan.

An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information: Type of Investment Mean Return Standard Deviation ---------------------------------- ----------- ------------------ Common stocks 12% 20% Long-term corporate bonds 6% 8% Intermediate-term government bonds 5% 5% U.S. Treasury bills 4% 3% Which of the following investments has the greatest reward/risk ratio if a return's standard deviation is an accurate assessment of investment risk? A. Common stocks B. Long-term corporate bonds C. Intermediate-term government bonds D. U.S. Treasury bills

The reward/risk ratio is the rate of return divided by a measure of risk (the standard deviation in this question). Computing this reward-to-risk ratio for U.S. Treasury bills gives 4%/3%, or 1.33, which exceeds the ratio for the other investment alternatives: Common stocks: 12%/20%, or 0.60 Long-term corporate bonds: 6%/8%, or 0.75 Intermediate-term government bonds: 5%/5%, or 1.00

Brewster Co. has the following financial information: Fixed costs $20,000 Variable costs 60% Sales price $50 What amount of sales is required for Brewster to achieve a 15% return on sales? A. $33,333 B. $50,000 Correct C. $80,000 D. $133,333

To achieve a 15% return on sales, $80,000 is required: Net income = 0.15 x Sales Sales - Variable costs - Fixed costs = Net income Sales - (0.60 x Sales) - $20,000 = 0.15 x Sales (0.85 x Sales) - (0.60 x Sales) = $20,000 0.25 x Sales = $20,000 Sales = $80,000

MFC Corporation has 100,000 shares of stock outstanding. Following is part of MFC's Statement of Financial Position for the last fiscal year. MFC Corporation Statement of Financial Position - Selected Items December 31, 2006 Cash $455,000 Accounts receivable 900,000 Inventory 650,000 Prepaid assets 45,000 Accrued liabilities 285,000 Accounts payable 550,000 Current portion, long-term notes payable 65,000 What is the maximum amount MFC can pay in cash dividends per share and maintain a minimum current ratio of 2 to 1? (Assume that all accounts other than cash remain unchanged.) A. $2.05 B. $2.50 C. $3.35 D. $3.80

To determine the maximum amount that MFC can pay in cash dividends per share and maintain a minimum current ratio of at least 2 to 1, you must set up an algebraic problem based on the current ratio formula: Total Current Assets ÷ Total Current Liabilities = Current Ratio We know Total Current Liabilities equals $900,000 and our desired minimum current ratio is 2.0. We also know cash dividends reduce cash, which reduces Current Assets, and have no affect on Current Liabilities. Replace these terms with these values and solve for Total Current Assets. If Total Current Assets ÷ $900,000 = 2.0, then Total Current Assets = $1,800,000 If Total Current Assets are now $2,050,000, a maximum of $250,000 may be paid out in cash dividends to keep Total Current Assets from dropping below $1,800,000 ($2,050,000 - $1,800,000 = $250,000). $250,000 of cash dividends divided by 100,000 of stock outstanding equals $2.50 per share ($250,000 ÷ 100,000 = $2.50).

DQZ Telecom is considering a project for the coming year which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment: Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par. Use $35 million of funds generated from earnings. The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted average cost of capital. A. 10.50% B. 8.50% C. 9.50% D. 15.83% You answered C. The correct

To solve this problem, a weighted average of the two different interest rates for the two different forms of capital needs to be calculated. $15 million of the $50 million will be debt with an after-tax cost of 7%. $35 million of the $50 million will be equity with a cost of 12%. $15 million / $50 million x .07 = .021 + $35 million / $50 million x .12 = .084 ---- Weighted average .105 or 10.5%. ====

A scattergraph is constructed for a certain mixed cost. The total cost observed at 2,000 machine hours is $16,000. The regression line intersects the cost axis at $8,000. What is the variable cost per machine hour for this mixed cost? A. $2.00 B. $3.00 C. $4.00 D. $8.00

Total cost observed at 2,000 machine hours $16,000 Less: Fixed cost (at 0 intercept) 8,000 ------- Total variable cost $ 8,000 ======= Variable cost per machine hour = $8,000 ÷ 2,000 machine hours = $4.00.

Based on potential sales of 500 units per year, a new product has estimated traceable costs of $990,000. What is the target price per unit to obtain a 15% profit margin on sales using the traditional markup calculation?

Traceable costs per unit = $990,000 / 500 = $1,980 This $1,980 represents 85% (i.e., 100% - 15%) of the target price. Target price per unit = $1,980 / .85 = $2,329.41

Selected information concerning the operations of a company for the year ended December 31 is as follows: Units produced 20,000 Units sold 18,000 Direct materials used $80,000 Direct labor incurred $40,000 Fixed factory overhead $50,000 Variable factory overhead $24,000 Fixed selling and administrative expenses $60,000 Variable selling and administrative expenses $9,000 Work-in-process inventories at the beginning and end of the year as well as the beginning finished goods inventory were zero. What was the company's finished goods inventory cost at December 31 under the variable (direct) costing method? A. $23,900 B. $19,400 C. $17,000 D. $14,400

Under the variable costing method, fixed manufacturing costs are assumed to be period costs. Only variable production costs are inventoriable. The cost of the ending finished goods inventory can be determined by calculating the total product costs incurred during the period and dividing that total into two components: Cost of goods sold (COGS) for the period Ending finished goods inventory Direct materials used $ 80,000 Direct labor incurred 40,000 Variable factory overhead 24,000 -------- Total production costs $144,000 Units produced / 20,000 -------- Cost per unit $ 7.20 Cost of ending finished goods inventory = Units in inventory x Cost per unit = 2,000 x $7.20 = $14,400

The regression analysis for the total costs results for ABC Co. is shown as y = 90x + 45. The standard error (Sb) is 30 and coefficient of determination (r2) is 0.81. The budget calls for production of 100 units. What is ABC's estimate of total costs? A. $3,090 B. $4,590 C. $9,030 D. $9,045

When developing a formula for total costs, a cost equation can be developed using a regression analysis; y would equal the total costs at any given level of activity x. In this problem, the activity is defined as the number of units produced; therefore, substituting 100 units for x, the following result is obtained: y = 90x + $45 = (90 x 100) + $45 = $9,000 + $45 = $9,045