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finc final

Terms in this set (149)

Which of these is a non cash payment made by a firm to its shareholders that lessens the value of each outstanding share?
stock dividend
davidson interiors declared a dividend to holders of record on Thursday, October 15, that is payable on Monday, November 2. Suenette purchased 200 shares on Monday Oct 12 and Jake purchased 100 shares the following day.
suenette will receive the dividend but Jake will not
which favors a high-dividend payout
corporate shareholders
a stock repurchase will
increase the market value per share
a share repurchase will
increase both earnings per share and the pe ratio
normal cash dividends that are increased regularly tend to send which message
the firm expects to be profitable
which of the following is directly related to increased in a firms current assets
carrying cost
ar financing is the term used to describe which one of the following types of loans that involves either the assignment or the factoring of a firm's ar
secured short term loan
which of the following are sources of cash
decreasing ar, increasing ap, increasing cs
which one of the following will increase operating cycle
decreasing ar turnover rate
which is true
inventory period is the avg number of days a firm holds inventory on its shelves
all else constant, which is correct concerning accounts payable perios
increase in ap period will decrease the cash cycke
which is indicative of a restrictive short term financial policy
minimizing the cash balances held by the firm
which of the following costs will tend to increase if a firm switches to a restrictive short term financial policy from a flexible short term policy
lost sales due to out of stock items, inventory warehousing costs, total annual order costs
sales=287,400. cogs=68%. avg inventory=37,800. profit margin=7% tax rate=34%. how many days on average to sell item?
70.60 days
sales=489,500. cogs=59%. profit margin=6.1% avg ar=41,700. on avg how long to collect payment?
31.09 days
inventory turnover=28.6, payables turnover=10.8, receivables turnover=14.4. cash cycle?
4.31 days
float is difference between
ledger balance and available balance
primary purpose of cash discount
induce customers to pay promptly
basic factors that are reviews when evaluating the creditworthiness of a potential customer
five Cs of credit
name on list with invoices
aging schedule
wrote check $18 on Friday may 6. check cleared on wed may 11.
may 10 the ledger balance was $18 less than the avaible balance
which one will reduce the disbursement float of a firm
writing checks on a zero balance account rather than on the master account
lockboxes should be located
geographically close to a firm's primary customers
which of these is the most ethical practice related to cash disbursement management
paying a supplier from a zero balance account
firm grants credit with term 2/10 net 30
customers have 10 days to pay to receive 2% discount
optimal credit policy any firm will
minimize the total cost of granting credit
which of these is the best example of raw material
set of tires for an automaker
three checks a day avg amount 16,410 each. generally clear 2.5 days after written. firm generally receives and deposits checks amounting 21,618 each day. all deposits avaible next day. firms net float?
net disbursement float of $101,475
nine checks total 168,000. on avg takes 1 day from the date of deposit for the funds to be avaible. avg daily float?
5,600
the length of time a firm must wait to recoup the money it has invested in a project is called
payback period
project's avg net income divided by its average book value is referred to as the projects average
accounting return
if the firms accepts project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. these projects are considered to be
mutually exclusive
a project has a net present value of zero. Which men of the follow best describes the project
the project's cash inflows equal its cash outflows in current dollar terms
which one of the following methods determines the amount of change a proposed project will have on the value of a firm
net present value
which one the following is an advantage of the ash accounting return method of analysis
easy availability of information needed for the computation
company required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.3 years and nov of 6,800. project B has expected payback period of 3.1 years and nov 28,400. Which should be accepted?
A
when the pv of the cash inflows exceed the initial cost of a project, then the project should be
accepted because the profitability index is greater than 1
assign job that have initial cost less than 1,000. Which method to use when making initial decisions.
payback
which two methods or project analysis are the most biased towards short term projects
payback and discounted payback
ex. internal rate of return=11.63%
profitability ratio=1.04
npv=$987
payback period=2.98 years
-discount rate used in computing nov was less than 11.63%
-discounted payback period must be more than 2.98 years
-this project should be accepted as the internal rate of return exceeds the required return
what is the nov of a project with the following cash flows if the rr is 9%?
year 0=-42,398
year 1=18,201
year 2=21,219
year 3=17,800
5,904.65

42,398+ (18,201/(1+1.09)^1) + (21,219/(1+1.09)^2) + (17,800/(1+1.09)^2)
two mutually exclusive projects with the following cash flows. which one to accept if discount rate is 8.5%? what if 13%?
A
year 0=-80,000
year 1=31,000
year 2=31,000
year 3=31,000

B
year 0=-80,000
year 1=0
year 2=0
year 3=110,000
accept B at 8.5 and not 13
an investment has the following cash flows and a rr of 13? based on irrigation should the project be accepted?
year 0=-42,000
year 1=15,400
year 2=28,400
year 3=7,500
no because the irrigation is less than the rr
You are considering an investment with the following cash flows. If the required rate of return for this investment is 15.5 percent, should you accept the investment based solely on the internal rate of return rule?
year 0=-152,000
year 1=98,200
year 2=102,300
year 3=-4,900
no because ti changes sign twice
Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?
year 0=-32,000
year 1=11,800
year 2=0
year 3=22,600
no the pi is .80
You are considering a project with an initial cost of $7,500. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively?
3.21 years

3+ ((75,000-1,100-1,640-3,800)/4500)
1. Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years. The project has a 12 percent required rate of return and an initial cost of $6,000. What is the discounted payback period?
3.72 years

3+ ((6000-5043.85)/1334.59)
which of the following costs was incurred in the past and cannot be recouped
sunk cost
which one of the following best describes the concept of erosion
the cash flows of a new project that come at the expense of a firm's existing cash flows
which is an example of a sunk cost
1,200 paid to repair a machine last year
which of the following best illustrates erosion as it relates to a hot dog stand located on a beach
selling fewer hot dogs because hamburgers were added to the menu
net working capital
can create either a cash inflow or a cash outflow at time zero of a project
pro forma statements for a proposed project should
-be compiled in a stand alone basis
-include all the incremental cash flows related to the project
-generally exclude interest expense
-include all project-related fixed asset acquisitions and disposals
Kelly's Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $280,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.47 million. What amount should be used as the initial cash flow for this project?
-1,810,000

-340,000-1,470,000
Webster & Moore paid $139,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $89,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?
89,000

the cost that is was offered for
Mason Farms purchased a building for $729,000 eight years ago. Six years ago, repairs were made to the building which cost $136,000. The annual taxes on the property are $11,000. The building has a current market value of $825,000 and a current book value of $494,000. The building is totally paid for and solely owned by the firm. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building?
825,000
the current market value
Nelson Mfg. owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,460,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm owes no debt on either the land or the facility at the present time. The firm received a bid of $1,500,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?
1,500,000

the offer received
Jefferson & Sons is evaluating a project that will increase annual sales by $138,000 and annual costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?
38,720

(138000-94000)(1-.32)+(110000/4)(.32)
t-bill returned 2% while investment in large company stocks earned 5%. the difference between the two
risk premium
market prices of the securities that trade in a particular market fairly reflect the available information related to those securities. Which one of the following terms best defines the market
efficient capital market
which are correct in relation to a stock investment
-the capital gains yield can be positive, negative, or zero
-the total return can be positive, negative, or zero
which one of the following categories of securities had the lowest average risk premium for the period 1926-2007
treasury bills
which earned the highest premium over 1926-2007
small-company stocks
which was the least volatile 1926-2007
treasury bills
inside information has the least value when financial markets are
strong form efficient
Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $0.15 a share. Today, you sold all of your shares for $40.10 per share. What is the total amount of your dividend income on this investment?
30

(.152)100
You own 400 shares of Western Feed Mills stock valued at $51.20 per share. What is the dividend yield if your annual dividend income is $352?
1.72%
(352/400)/51.20
Last year, you purchased 500 shares of Analog Devices, Inc. stock for $11.16 a share. You have received a total of $120 in dividends and $7,190 from selling the shares. What is your capital gains yield on this stock?
28.85%

[(7190/500)-11.16]/11.16
What is the amount of the excess return on a U.S. Treasury bill if the risk-free rate is 2.8 percent and the market rate of return is 8.35 percent?
0
no excess return for t bill
aftertax cost of debt generally increases when
-the market rate of interest increases
-tax rates decrease
cost of preferred stock
is equal to the dividend yield
which of the following statements is correct for a firm that uses debt in its capital structure
the WACC should decrease as the firm's debt-equity ratio increases
the discount rate assigned to an individual project should be based on
the risks associated with the use of the funds required by the project
company paid annual dividend of $.65 per share. The stock has a market price of $13 and a beta of 1.12. The return on the t bill is 2.5% and the market risk premium is 6.8%. What is the cost of equity?
10.12%
0.025+(1.12*0.068)
company has a growth rate of 4.8% and is equally risky as the market. the stock is currently selling for $17 a share. the overall stock market has a 10.6% rate of return and a risk premium of 8.7%, What is the expected rate of return on this stock?
(0.106-0.087)+(1*0.087)
Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt?
3.98%
Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company's pre-tax cost of debt?
5.66%
The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon. What is the firm's aftertax cost of debt if the tax rate is 30 percent?
6.11%

solve then 0.087285* (1-.30)
Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock?
14.42%
(0.075*100)/52
Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital?
45.16%

debt=1200*990
preferred=2500*28
common=28000*37
total=2,294,000
weight=1,036,000/2,294,000
Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital?
12.81%
debt=550,000*1.012
preferred=25,000*41
common=220000*(27
total=7,521,600

WACC= (5,940,000/7,521,600)(0.143)+(1,025,000/7,521,600)(0.085)+(556,600/7,521,600)(0.076)(1-0.37)
which of the following is a preliminary prospectus
red herring
Soup Galore is a partnership that was formed three years ago for the purpose of creating, producing, and distributing healthy soups in a dried form. The firm has been extremely successful thus far and has decided to incorporate and offer shares of stock to the general public. What is this type of an equity offering called?
initial public offering
Denver Liquid Wholesalers recently offered 50,000 new shares of stock for sale. The underwriters sold a total of 53,000 shares to the public. The additional 3,000 shares were purchased in accordance with which one of the following?
green shoe provision
Roy owns 200 shares of R.T.F., Inc. He has opted not to participate in the current rights offering by this firm. As a result, Roy will most likely be subject to:
dilution
which of the following should be considered when selecting a venture capitalist
-level of involvement
-past experiences
-termination of funding
-financial strength
with Dutch auction underwriting
all successful bidders pay the same price
when a firm announces an upcoming seasoned stock offering, the market price of the firm's existing shares tends to
decrease
which of the following statements is correct concerning the costs of issuing securities?
there tends to be substantial economies of scale when issuing securities
Before a seasoned stock offering, you owned 7,500 shares of a firm that had 500,000 shares outstanding. After the seasoned offering, you still owned 7,500 shares but the number of shares outstanding rose to 625,000. Which one of the following terms best describes this situation?
percentage ownership dilution
The ex-dividend date is defined as _____ business day(s) before the date of record.
2
which one of the following does not affect the total equity of a firm but does increase the number of shares outstanding
stock split
Billingsley United declared a $0.20 a share dividend on Thursday, October 16. The dividend will be paid on Monday, November 10 to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?
Wed, Oct 29
which one of the following favors a low dividend policy
the tax on capital gains is deferred until the gain is realized
the information content of a dividend increase generally signals that
management believes earning growth will be strong going forward
a stock repurchase program
is essentially that same as a cash dividend program provided there are no taxes or other costs
which one of the following statements is correct
maintaining a steady dividend is a key goal of most dividend-paying firms
Revol-Tech is a technology firm with excellent growth prospects. The firm wishes to do something to acknowledge the loyalty of the shareholders but needs all of its available cash to fund the firm's rapid growth. The market price of the stock is currently trading at the upper end of its preferred trading range. The firm is most apt to consider which one of the following in this situation?
stock split
a stock split
decreases the market value per share
Steve purchased 300 shares of Alpha Beta stock on May 9. On May 15, he purchased another 200 shares and then on May 22 he purchased a final 400 shares of Alpha Beta stock. The company declared a dividend of $1.60 a share on April 30 to holders of record on Friday, May 23. The dividend is payable on June 2. How much dividend income will Steve receive on June 2 from Alpha Beta?
800

200+300(1.60)
the length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called
operating cycle
length of time between the sale of inventory and the collection of the payment for that sale is called
account receivables period
costs that increase as a firm acquires additional current assets are called
carrying costs
money deposited by a borrower with the bank is a low or non-interesting-bearing account as a condition of a loan agreement is called
compensating balance
which are uses of cash
-increasing inventory
- obtaining a bank loan
which one of the following will decrease the net working capital of a firm? Assuming the current ratio is greater than 1
paying a payment on a long-term debt
which of the following will increase the operating cycle
decreasing the receivable turnover rate
which one of the following will decrease the operating cycle
increasing the accounts receivable turnover rate
an increase in which one of the following will decrease the cash cycle
inventory turnover rate
which of the following is correct
-an increase in the accounts payable period shortens the cash cycle
-a negative cash cycle is preferable to a positive cash cycle
an increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive
accounts receivable turnover rate
which one of the following is indicative of a short term restrictive financial policy
purchasing inventory on an as-needed basis
The Lumber Mart recently replaced its management team. As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating. Which of the following should the employees expect as a result of this policy change?
-reduction in sales due to stock outs
-decreased sales due to the new accounts receivable credit policy
-decreased investment in marketable securities
A flexible short-term financial policy:
-tends to increase sales as compared to a restrictive policy
-requires a sizable investment in current assets
-incurs more carrying costs than a restrictive policy
the optimal investment in current assets for an operating firm occurs at the point where
the total costs of holding current assets is minimized
Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $41,000 and an ending inventory of $47,000. What is the length of the inventory period?
26.72 days

Inventory turnover = $601,000/[($41,000 + $47,000)/2] = 13.65909Inventory period = 365/13.65909 = 26.72 days
The Blue Star has sales of $387,000, costs of goods sold of $259,000, average accounts receivable of $9,800, and average accounts payable of $12,600. How long does it take for the firm's credit customers to pay for their purchases?
Receivables turnover = $387,000/$9,800 = 39.4898Receivables period = 365/39.4898 = 9.24 days
HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $442,000. What is the payables turnover rate?
7.86

Payables turnover = $442,000/[($57,300 + $55,100)/2)] = 7.86 times
Merryl Enterprises currently has an operating cycle of 62 days. The firm is analyzing some operational changes, which are expected to increase the accounts receivable period by 2 days and decrease the inventory period by 5 days. The accounts payable turnover rate is expected to increase from 42 to 46 times per year. If all of these changes are adopted, what will the firm's new operating cycle be?
59

Operating cycle = 62 + 2 - 5 = 59 days
Interior Designs has an inventory period of 46 days, an accounts payable period of 38 days, and an accounts receivable period of 32 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. If the new discount is taken, the operating cycle will be _____ days. A. 52
78

Original operating cycle = 46 + 32 = 78 days
West Chester Automation has an inventory turnover of 16 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle?
25.63

Cash cycle = (365/16) + 36 - (365/11) = 25.63 days
A company currently has a 48 day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 3 days, and increases its payables period by 4 days. What will the length of the cash cycle be after these changes?
45

Cash cycle = 48 - 2 + 3 - 4 = 45 days
Yesterday, the president of RB Enterprises received a phone call from DLK, a competitor. DLK is a sole proprietorship. An unexpected family situation has caused the owner to suddenly want to retire and relocate closer to his family. Thus, the assets of DLK are being offered to RB Enterprises at a bargain basement price. While RB Enterprises had not anticipated purchasing these assets, it was decided that the opportunity was too good to pass up. This illustrates which of the following needs to hold cash?
speculative
a lockbox is
a post office box strategically located so that a firm's receivables can be collected faster
an account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is
zero balance account
why do firms need liquidity
-to meet compensating balance requirements
-to take advantage of an opportunity that suddenly arises
-to conduct daily business activities
-to be prepared for financial emergency
disbursements float
is eliminated when payments are made electronically
which one is corrects
net float is equal to a firm's available balance minus its book balance
which reduces collection time
-billing customers electronically rather than by mail
-accepting debit cards but not checks as payment for a sale
-offering cash discounts for early payment
-reducing the processing delay by one day
Lockboxes
should be geographically located close to a firm's primary customers
the main purpose of a cash concentration account is to
consolidate funds
a zero-balance account
Is funded on an as-needed basis only.
which is correct
t bills are well suited for short term investments
money market securities have which of the following characteristics
-low default risk
-high degree of liquidity
-low rates of return
The Hobby Shop has a checking account with a ledger balance of $692. The firm has $1,063 in uncollected deposits and $846 in outstanding checks. What is the amount of the disbursement float on this account?
846

the outstanding checks
On average, your firm receives 62 checks a day from customers. These checks, on average, are worth $39.90 each and clear the bank in 1.5 days. In addition, your firm disburses 38 checks a day with an average amount of $89.50. These checks clear your bank in 2 days. What is the average amount of the collection float?
3,710.70

Collection float = 62$39.901.5 = $3,710.70
Your company has an available balance of $7,911. A deposit of $2,480 that was made this morning is not yet included in the bank's balance. There are also 4 checks outstanding with a value of $325 each. What is the net float?
net collection float of $1,180

Net collection float = $2,480 - (4 ´ $325) = $1,180
Town Hardware sells goods on credit with payment due 30 days after purchase. If payment is not received by the 30th day, the store mails a friendly reminder to the customer. If payment is not received by the 45th day, the store calls the customer and requests payment and also stops offering credit to that customer. These procedures are referred to as the store's:
collection policy
Roger's Home Appliances offers credit to customers it deems worthy of this privilege. To determine if a customer is worthy, the firm computes a numerical value which is used to estimate the probability that the customer will default if credit is granted to them. The process of computing this numerical value is referred to as:
credit scoring
which one of the following is a system for managing demand-dependent inventories that minimizes the inventory levels of a firm?
just-in-time inventory
Which one of the following will increase a firm's investment in accounts receivables?
an increase in average daily credit sales
which one of the following factors tends to favor longer credit periods
increased compensation
a cash discount of 2/5, net 30
offers customers a maximum of 30 days credit.
which of the following statements correctly reflect the effects of granting credit to customers
-total revenues may increase if both the quantity sold and the price per unit increase when credit is granted\-a firm's cash cycle generally increases if credit is granted, all else equal
-both the cost of default and the cost of discounts must be considered before granting credit
-a firm may have to increase its long-term borrowing if it decided to grant credit to its customers
Which of the following are frequently used as sources of information when trying to ascertain the creditworthiness of a customer?
-payment history with similar firms
-credit reports
-financial statements
-information provided by the bank
which one of the five Cs of credit refers to a firm's financial reserves
capital
which one is correct
an aging schedule helps identify those customers who are the most delinquent
Today, October 12, Nadine's Fashions purchased $511 worth of merchandise from a supplier. The credit terms are 1/5, net 20. By what day does Nadine's have to make the payment to receive the discount? Note: October has 31 days
oct 17
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