Quiz 3

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Feb 20, 2024

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Corporate Finance - Quiz 3 Question 1 Marks: 1 Assuming trade credit terms of 2/10 net 40, paying the supplier on the 30th day creates an annualized cost of trade credit (%) closest to: Choose one answer. a. 44.6 b. 109 c. 27.9 Question 2 Marks: 1 Which of the following methods would be least likely to improve the cash collections of a retail organization? Choose one answer. a. Lockbox b. Debit cards c. Electronic checks Question 3 Marks: 1 Assuming current assets and current liabilities remain a constant proportion of sales (30 percent and 20 percent respectively), as sales grow 5 percent annually, through time the current ratio will most likely: Choose one answer. a. remain unchanged. b. decrease. c. increase. Question 4 Marks: 1 A company extends its trade credit terms by four days to all its credit customers. The most likely effect of this change to the company’s credit customers is a four day:

Choose one answer. a. increase in their operating cycle. b. decrease in their operating cycle. c. decrease in their net operating cycle. Question 5 Marks: 1 Which is most likely considered a secondary source of liquidity? Choose one answer. a. Liquidating long-term assets. b. Centralized cash management system. c. Trade credit. Question 6 Marks: 1 In a sales-driven pro forma analysis, retained earnings is most accurately forecasted as: Choose one answer. a. previous retained earnings plus forecasted net income less forecasted dividends. b. previous retained earnings plus forecasted financing surplus or deficiency. c. a percentage of forecasted sales. Question 7 Marks: 1 Other factors held constant, the reduction of a company’s average accounts payables due to suppliers offering less trade credit will most likely: Choose one answer. a. reduce the operating cycle. b. not affect the operating cycle. c. increase the operating cycle. Question 8 Marks: 1 An inventory system that reduces average inventory without affecting sales will most likely reduce the:

Choose one answer. a. cash conversion cycle. b. inventory turnover. c. quick ratio. Question 9 Marks: 1 A company currently has sales of €1,200 thousand and it makes the following forecasts for the next year: Sales growth next year: 10% Cost of goods sold as a proportion of sales: 75% Salary, general, and administrative expenses as a proportion of sales: 10% The expected gross profit for next year (in thousands) is closest to: Choose one answer. a. €300. b. €330. c. €198. Question 10 Marks: 1 The annual cost of trade credit assuming a 365-day year for terms 3/10 net 40 is closest to: Choose one answer. a. 45% b. 32% c. 43%

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Question 11 Marks: 1 The following information applies to a companys preferred stock: Current price $47.00 per share Par value $50.00 per share Annual dividend $3.50 per share If the companys marginal corporate tax rate is 34 percent, the after-tax cost of preferred stock is closest to: Choose one answer. a. 7.45%. b. 4.62%. c. 7.00%. d. 4.91%. Question 12 Marks: 1 A manufacturing company is expected to pay cash dividends of $6 one year from today and growth is expected to be 7 percent. The current market price of the companys common stock is $72 per share. The companys tax rate is 34 percent. Based on this information, the companys after-tax cost of retained earnings is closest to: Choose one answer. a. 15.33%. b. 15.92%. c. 10.12%. d. 14.79%. Question 13 Marks: 1 Financial leverage differs from operating leverage because financial leverage accounts for a companys: Choose one answer.

a. use of debt. b. use of plant and equipment. c. variability in fixed operating costs. d. variability in sales. Question 14 Marks: 1 Graham Industries has two separate divisions: The Farm Equipment Division and the Household Products Division. Each division accounts for about 50 percent of the companys revenues and assets. Managers now want to enter the toy industry. In assessing the attractiveness of investment projects in the toy industry, Graham should use a required rate of return based on: Choose one answer. a. the required rate of return on the market portfolio. b. Graham c. a weighted-average required return computed for the farm equipment, household products, and toy industries. d. a required return computed for the toy industry. Question 15 Marks: 1 An investment project, with the same risk as the company, has an internal rate of return of 12 percent and a positive net present value of $25 million. If the projected cash inflows are reinvested at the companys weighted average cost of capital, the realized return from the project should be: Choose one answer. a. less than 12 percent. b. less than the companys weighted average cost of capital. c. greater than 12 percent. d. 12 percent.

Question 16 Marks: 1 A companys management gathered the following information about an expansion project that has a five-year useful life: Project cost $80,000 Shipping and installation cost $20,000 Increase in net working capital $10,000 Annual project earnings before depreciation and taxes $25,000 Annual project depreciation $20,000 Companys marginal tax rate 30% The company expects to recover half of the net working capital at the end of the projects life but expects the project to have no salvage value. The project’s initial investment outlay and final year total cash flow, respectively, are closest to: Choose one answer. a. $110,000 and $28,500 b. $100,000 and $22,500 c. $110,000 and $22,500 d. $100,000 and $28,500 Question 17 Marks: 1 A companys dividend policy is based on a strict residual model. All other factors being equal, if the companys dividend payout decreased from 50 percent in 2011 to 20 percent in 2012, the company most likely experienced: Choose one answer. a. an increase in investment opportunities. b. a decrease in investment opportunities. c. no change in investment opportunities, but an increase in the weighted average cost of capital. d. no change in investment opportunities, but an increase in the targeted debt-to-assets ratio.

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Question 18 Marks: 1 To measure the change in shareholder wealth associated with an investment project, the most appropriate evaluation method for an analyst to use is: Choose one answer. a. internal rate of return. b. payback. c. net present value. d. modified internal rate of return. Question 19 Marks: 1 Assume that a firm has a degree of operating leverage of 2.0 and a degree of financial leverage of 3.0. If sales increase 10%, that would imply that EBIT would increase ____ and EPS would increase _______. Choose one answer. a. 20%, 26% b. 30%, 60% c. 20%, 50% d. 20%, 60% Question 20 Marks: 1 Which of the following are advantages of share repurchasing vs paying cash dividends? I. Positive signal that management thinks the stock is undervalued II. Company can make major capital structure changes III. Reduces the debt ratio of the company IV. Requires no cash to be paid out.

Choose one answer. a. II and III b. II only c. I and II d. I only Question 21 Marks: 1 The management of BB Corp is concerned about the recent rapid decline in their common stock price. In an attempt to support the shares, management would be most likely to: Choose one answer. a. negotiate with a major shareholder. b. send a tender offer to existing shareholders. c. repurchase shares in the open market. d. authorize a share buy back. Question 22 Marks: 1 Web Company has a cash conversion cycle of 90 days. Its inventory turnover reduces from 6 to 5. What is the effect on the cash conversion cycle? Choose one answer. a. Increases by approximately 12 days b. Cash conversion cycle halves c. Stays the same d. Decreases by approximately 12 days Question 23 Marks: 1 The management of G Corp. anticipates that it will have a current ratio of less than one at the end of the current year. What would be the effect on G Corp's current ratio if it raised funds through a short-term loan on the balance sheet date at the end of the year? Choose one answer.

a. Worsen the current ratio b. Unable to say how it will affect the current ratio c. Improve the current ratio d. Have no effect on the current ratio Question 24 Marks: 1 Kansaaw Inc. has 150,000 bonds outstanding, each with a $1,000 par value and a current market price of $980. Kansaaw also has 3 million shares of common stock outstanding with a current market price of $36 per share and a book value of $45 per share. Kansaaw's management does not expect to change the firms capital structure in any material way in the future. What weights for debt and equity should the firm use to calculate its weighted average cost of capital? Choose one answer. a. Debt 52.63%, Equity 47.37% b. Debt 58.14%, Equity 41.86% c. Debt 57.65%, Equity 42.35% d. Debt 52.13%, Equity 47.87% Question 25 Marks: 1 RDJ Inc. has an asset beta of 0.95. Its current capital structure is 60% debt, 40% equity. What is the firms equity beta? Ignore taxes. Choose one answer. a. 0.766 b. 1.583 c. 2.375 d. 1.243

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As a company accounts payable manager, which of the following credit terms are most likely to entice you to take the cash discount? A. 2/10 net 90 B. 1/10 net 45 C. 2/10 net 60 D. 1/10 net 30

RESET 22. Which of the following statements explain charge cards? A. A short-term facility given by banks to current account holders. B. Similar to credit cards except that the outstanding balance must be paid in full or else interest will be charged. C. Card facility offered by department or retail stores to encourage them to purchase goods and services from their stores only. D. A loan facility given by banks to consumers whereby interest is charged each month on outstanding balance and customers can pay by the balance in installment. Cancel Done 中。

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2021 2022 2023 Year Forsen Computing Net Credit Sales $1,557,200 1,855,310 2,165,170 Ending Accounts Receivable $398,000 414,400 500,780 1. Compute the accounts receivable turnover ratios and the number of days' sales in receivables ratios for 2022 and 2023 (round answers to two decimal places) What do the outcomes tell a potential investor about Vortex Computing if industry average for accounts receivable turnover ratio is 4 times and days' sales in receivables ratio is 85 days? 94% See 2 Edito

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Question 5 a. Cash discounts will normally appear on an invoice in terms such as 2/10 n30. What does this mean for an invoice of value GH¢10,000? b. Extracts from the profit and loss account for the year and the balance sheet as at the end of the year for NORA Enterprise are shown below. Assume all sales and purchases are on credit terms. Item Sales Amount GH¢ 200,000 Cost of goods sold 150,000 Purchases 120,000 Accounts Receivable 35,500 Accounts Payable 18,000 Inventory Finished goods 15,000 Work in progress 28,000 37,000 Raw materials i. Calculate the overall inventory turnover period and ratio. ii. Calculate the accounts receivable turnover period and ratio. iii. Compute the accounts payable turn over period and ratio. iv. What do the values computed in (a), (b) and (c) mean? v. What is the length of the operating cycle and the cash conversion cycle?

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The contra revenue account that represents the reduction in the amount paid by a credit customer if payment is made within a specified period of time is known as which of the following: O Contra revenue account O Sales allowance account O Sales discount account O Allowance for uncollectible accounts ASUS f3 f4 f5 f6 f7 f8 f9 f10 f11 区ロ/京 %24 & 3 4. 7. 8 9. 01 Y U G H. J K 16 5 图

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