DeVry BUSN379 Final Exam Study Questions and Answers

DeVry BUSN379 Final ExamStudy Questions and Answers

(TCO 4) Which of the following is true regarding the evaluation of projects? (4 points)

sunk costs should be included

erosion effects should be considered

financing costs need to be included

opportunity costs are irrelevant

Week 4 Lecture, Chapter 9, Pages 269-270



erosion effects should not be considered

financing costs are not included

opportunity costs are irrelevant




erosion effects should not be considered

financing costs need to be included

opportunity costs are relevant


(TCO 4) Which of the following investment ranking methods does not consider the time value of money? (4 points)

net present value method

payback method

internal rate of return method

all of these are time-adjusted methods

Chapter 8, Page 237

(TCO 4) There are several disadvantages to the payback method, among them: (4 points)

payback ignores cash flows beyond the cutoff.

payback can be used in conjunction with time adjusted methods of evaluation.

payback is easy to use and to understand.

none of the above is a disadvantage.

Chapter 4, Page 237

(TCO 4) There are several disadvantages to the payback method, among them: (4 points)

payback ignores the time value of money.

payback can be used in conjunction with time adjusted methods of evaluation.

payback is easy to use and to understand.

none of the above is a disadvantage.

Chapter 4, Page 237

(TCO 3 and 4) The net present value is:(4 points)

negative when a project's benefits exceed its costs.

equal to the present value of an investment's benefits.

equal to zero when the discount rate equals the IRR.

negative when a project's IRR exceeds the required rate of return.

the current measure of a project's cash inflows.

Chapter 8, Page 241

(TCO 3 and 4) A net present value of zero implies that an investment:(4 points)

has no initial cost.

has an expected return that is less than the required return.

should be rejected even if the discount rate is lowered.

never pays back its initial cost.

is earning a return that exactly matches the requirement.

Chapter 8, Page 241

(TCO 3 and 4) You can ensure that an investment is expected to create value for (4 points)

have a PI equal to zero.

produce negative rates of return.

have positive AARs.

have positive IRRs.

have positive NPVs.

Chapter 8, Page 233

a firm's owners by selecting projects that:

(TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent?

Year

0 1 2 3 4

Cash flow

-$45,000

$11,520

$13,630

$16,470

$18,990

(4 points)

-$2,989.48

-$2,599.55

$1,153.37

$2,880.08

$3,312.09

(TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent?

Year

0 1 2 3 4

Cash flow

-$32,000

$9,000

$10,000

$15,200

$7,800

(4 points)

$1,085.25

$1,193.77

$3,498.28

$4,102.86

$4,513.15

(TCO 3 and 4) Portman's is considering adding a new product to its lineup. This product is expected to generate sales for three years, after which time the product will be discontinued. What is the project's net present value, if the firm wants to earn a 12 percent rate of return?

Year

0 1 2 3

Cash flow

-$62,0

00

$10,730

$20,190

$40,340

(4 points)

$7,611.08

$6,795.61

$1,084.41

$4,862.07

$9,682.26

(TCO 4) Howard Company is considering a

new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project?(4 points)

5.81 years

6.05 years

6.96 years

7.90 years

This project never pays back

Chapter 8 Pages 235-236Payback = 7 + ($575,000 – $445,000) / $145,000 = 7.90 years

(TCO 4) The Inventive Co. is considering a new project. This project requires an initial cash investment of $70,000. The project will generate cash inflows of $10,500 in the first year. Then, the project will do nothing for two years, after which time cash inflows of $25,000 will be generated for four years. How long will it take the Inventive Co. to recover its $70,000 investment?(4 points)

5.16 years

5.38 years

6.11 years

6.62 years

6.94 years

Chapter 8 Pages 235-236Payback = 5 + ($70,000 – $60,500) / $25,000 = 5.38 years

(TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period?(4 points)

4.18 years

5.82 years

6.62 years

7.79 years

This project never pays back

Chapter 8 Pages 235-236Payback = 4 + ($115,000 − $110,000) / $27,500 = 4.18 years

(TCO 4) The postponement of a project until conditions are more favorable: (4 points)

is a valuable option.

is referred to as the option to extend.

could not cause a negative net present value project to become a positive net present value project.

will generally cause the internal rate of return for a project to decline.

Chapter 9, Pages 290-291

(TCO 4) The postponement of a project until conditions are more favorable: (4 points)

is not a valuable option.

is referred to as the option to extend.

could cause a negative net present value project to become a positive net present value project.

will generally cause the internal rate of return for a project to decline.


(TCO 4) Ignoring the option to expand:(4 points)

overestimates the internal rate of return on a project.

ignores the possibility that a negative net present value project might be positive, given changes over time.

ignores the possibility that one variable is the primary source of the forecasting risk associated with a project.

underestimates the net present value of a project.


(TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects.(4 points)

capital planning.

soft rationing.

capital rationing.

hard rationing.

a sunk cause.


(TCO 4) The situation that exists when the units within a business are allotted a fixed amount of money for capital budgeting, is referred to as:(4 points)

soft rationing.

hard rationing.

unit capital rationing.

allocated planning.

strategic planning.


(TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances.(4 points)

contingency planning.

hard rationing.

soft rationing.

capital constraint.

scenario analysis.


(TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment?(4 points)

The net present value of the project is approximately $10,000

This project should be accepted because it has a positive net present value

This project’s payback period is 10 years or more

None of the above is true

Chapter 8, Pages 232-237NPV = ($6,000 x .909) + ($4,000 x .826) + ($3,000 x .751) – $10,000 = $1,011

(TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment?(4 points)

The net present value of the project is approximately $1,011

This project should be accepted because it has a negative net present value

This project’s payback period is 10 years or more

All of the above are true


(TCO 3 and 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment?(4 points)

The net present value of the project is $11,000

This project should be accepted because it has a negative net present value

This project should be accepted because it has a payback higher than 3 years

The net present value of the project is close to $1,000


(TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS?(4 points)

$12,000

$8,574

$19,800

None of the above

Chapter 9, Page 277$60,000 x 14.29% = $8,574

(TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS?(4 points)

$12,000

$8,575

$19,800

None of the above

Chapter 9, Page 277$60,000 x 20% = $12,000

(TCO 4) Assume Company X plans to invest $60,000 in new computers. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the second year depreciation amount under MACRS?(4 points)

$12,000

$19,200

$19,800

None of the above

Chapter 9, Page 277$60,000 x 32% = $19,200

(TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (4 points)

$82,000

$110,000

$42,000

none of these

Chapter 2, Pages 34-39, Chapter 9 Page 275

After Tax Cash Flows: Net Income + Depreciation

Net Income = $100,000 - $40,000 = $60,000 – Taxes

Taxes = $60,000 x 30% = $18,000

Net Income = $60,000 – 18,000 = $42,000

After Tax Cash Flows: Net Income + Depreciation = $42,000 + 40,000 = $82,000

(TCO 1 and 4) Assume a project has earnings before depreciation, and taxes of $110,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (4 points)

$47,000

$89,000

a loss of $21,000

none of these



Net Income = $110,000 - $40,000 = $70,000 – Taxes

Taxes = $70,000 x 30% = $21,000

Net Income = $70,000 – 21,000 = $49,000


(TCO 1 and 4) Assume a project has earnings before depreciation and taxes of $120,000, depreciation of $40,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? (4 points)

$56,000

$96,000

a loss of $21,000

none of these



Net Income = $120,000 - $40,000 = $80,000 – Taxes

Taxes = $80,000 x 30% = $24,000

Net Income = $80,000 – 24,000 = $56,000


(TCO 8) Which of the following statements is true regarding systematic risk?(4 points)

is diversifiable

is the total risk associated with surprise events

it is measured by beta

it is measured by standard deviation


(TCO 8) Which of the following statements is true regarding systematic risk?(4 points)

is diversifiable

is the total risk associated with surprise events

it is not project or firm specific

it is measured by standard deviation


(TCO 8) Which of the following factors will affect the expected rate of return on a security?(4 points)

multiple states of the economy

probability of occurrence for any one economic state

market rate of return given a particular economic state

all of the above will affect the expected rate of return


(TCO 8) Which statement is true regarding risk? (4 points)

the expected return is usually the same as the actual return

a key to assess risk is determining how much risk an investment adds to a portfolio

risks can always be decreased or mitigated by the financial manager

the higher the risk, the lower the return investors require for the investment

Week 5 Lecture

(TCO 8) Which statement is not true regarding risk?(4 points)

the expected return is always the same as the actual return


risks can not always be diversified

the higher the risk, the higher the return investors require for the investment

Week 5 Lecture

(TCO 8) Which statement is not true regarding risk?(4 points)

the expected return is usually not the same as the actual return


some risks can not be decreased or mitigated by the financial manager.

the higher the risk, the higher the return investors require for the investment

all of the above are true statements

Week 5 Lecture

(TCO 8) The stock of Uptown Men's Wear is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy

Probability of State of Economy

Rate of Return

Recession .20 -.10

Normal .75 .14

Boom .05 .22

(4 points)

9.6 percent

10.4 percent

12.8 percent

13.6 percent

15.3 percent

Chapter 11, Pages 340-341Expected return = (.20 &#-41; -.10) + (.75 &#-41; .14) + (.05 &#-41; .22) = -.02 + .105 + .011 = .096 = 9.6 percent

(TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy


Rate of Return

Recession .02 -.06

Normal .88 .11

Boom .10 .17

(4 points)

7.33 percent

9.82 percent

11.26 percent

11.33 percent

11.50 percent

Chapter 11, Pages 340-341Expected return = (.02 &#-41; -.06) + (.88 &#-41; .11) + (.10 &#-41; .17) = -.0012 + .0968 + .0170 = .1126 = 11.26 percent

(TCO 8) The stock of Hobby Town has an expected return of 8.8 percent. Given the information below, what is the expected return on this stock if the economy is normal?

State of Economy


Rate of Return

Recession .10 -.09

Normal .70 ?

Boom .20 .26

(4 points)

3.86 percent

4.42 percent

6.43 percent

7.28 percent

8.21 percent

Chapter 11, Pages 340-341.088 = (.10 &#-41; -.09) + (.70 &#-41; x) + (.20 &#-41; .26) = .088 = -.009 + .7x + .052 x = .06429 = 6.43 percent

(TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D?(4 points)

17.68 percent

17.91 percent

18.42 percent

19.07 percent

19.46 percent

Chapter 11, Page 344

Answer: $5,500/(8,000+4,600+13,000+5,500) = $5,500/31,100 = 17.68%

(TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock B?(4 points)

14.79 percent

15.91 percent

18.42 percent

19.07 percent

19.46 percent


Answer: $4,600/(8,000+4,600+13,000+5,500) = $4,600/31,100 = 14.79%

(TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock A?(4 points)

14.79 percent

15.91 percent

18.42 percent

19.07 percent

25.72 percent


Answer: $8,000/(8,000+4,600+13,000+5,500) = $8,000/31,100 = 25.72%

(TCO 8) You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. The one stock has a beta of .80. What does the beta of the second stock have to be if you want the portfolio risk to equal that of the overall market?(4 points)

1.4

1.6

1.8

2.0

2.2


1/3(0) + 1/3(.80) + 1/3(x) = 1.00 + .80 + x = 3x = 2.2

(TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner such that the risk of the new portfolio matches that of the overall market. What does the beta of the new security have to be?(4 points)

.46

.55

.61

.70

.90


(TCO 8) Stock A has an expected return of 14 percent and a beta of 1.3. Stock B has an expected return of 10 percent and a beta of .9. Both stocks have the same reward-to-risk ratio. What is the risk-free rate?(4 points)

1.0 percent

1.8 percent

2.3 percent

2.5 percent

3.1 percent


(TCO 8) Company insiders cannot earn excess profits based on the knowledge they have related to their employer if the financial markets are:(4 points)

weak form efficient.

strong form efficient.

semistrong form efficient.

efficient at any level.

aware that the trader is an insider.


(TCO 8) If the financial markets are strong form efficient, then:(4 points)

only the most talented analysts can determine the true value of a security.

only company insiders have a marketplace advantage.

technical analysis provides the best tool to gain a marketplace advantage.

no one person has an advantage in the marketplace.

every security offers the same rate of return.


(TCO 8) Weak form market efficiency states that the value of a security is based on:(4 points)

all public and private information.

historical information only.

all publicly available information.

all publicly available information, plus any data that can be gathered from insider trading.

random information with no clear distinction as to the source of that information.


(TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 6 percent (after-tax) and common equity at a cost of 18 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the weighted average cost of capital?(4 points)

between 3 and 9%

exactly 12%

more than 14%

exactly 11%

none of the above

Weighted

Cost Weights Cost

Debt 6% 50% 3%

Common equity 18% 50% 9%

Weighted average cost of capital 12%

(TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at a cost of 9 percent (after-tax) and common equity at a cost of 16 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the weighted average cost of capital?(4 points)

between 4.5% and 8%

more than 13%

between 12 and 13%

between 13 and 14%

none of the above

Weighted

Cost Weights Cost

Debt 9% 50% 4.5%

Common equity 16% 50% 8.0%

Weighted average cost of capital 12.5%

(TCO 5) Royal Petroleum Co. can buy a piece of equipment that can be financed with debt at an after-tax cost of 8 percent and common equity at a cost of 20 percent. Assume debt and common equity each represent 50 percent of the firm's capital structure. What is the

weighted average cost of capital?(4 points)

between 4% and 10%

between 11 and 12%

between 12 and 13%

exactly 14%

more than 14%

Weighted

Cost Weights Cost

Debt 8% 50% 4%

Common equity 20% 50% 10%

Weighted average cost of capital 14%

(TCO 5, 6 and 7) An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32, assuming a constant growth rate of six percent. What is the required rate of return? (4 points)

10.3%

10.1%

4.1%

5.8%


Answer: R = D1/P0 + g = 2.32/57.20 + 0.06 = 0.1006 = 10.06%

(TCO 5, 6 and 7) An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to eight percent. If the required rate of return is 13 percent, what is its current price? (4 points)

$103.68

$36.92

$96.00

none of these


Answer: P = D1/R-g = $4.80 /(0.13-0.08) = $96

(TCO 5, 6 and 7) An issue of common stock's most recent dividend is $3.75. Its growth rate is eight percent. What is its price if the market's rate of return is 16 percent? (4 points)

$25.01

$46.88

$50.63

none of these


Answer: P = D1/R-g = $4.80 /(0.13-0.08) = $96

(TCO 5, 6 and 7) Which of the following is not true regarding the cost of debt?(4 points)

It is the return that the firm’s creditors demand on new borrowing.

It is the interest rate that the firm pays on current/existing borrowing.

An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.

It needs to be converted into an after-tax cost.

Chapter 12, Pages 384-385 and Week 6 Lecture

(TCO 5, 6 and 7) Which of the following is true regarding the cost of debt?(4 points)

It is the return that the firm’s creditors demand on new borrowing.

It is always equal to the weighted cost of capital.

An appropriate method to compute the cost of debt is using the coupon rate of current bonds outstanding.

All of the above are true.


(TCO 5, 6 and 7) Which of the following is true regarding the cost of debt?(4 points)

It is the same as cost of equity.

It is the interest rate that the firm pays on current/existing borrowing.

An appropriate method to compute the cost of debt is using the YTM of current bonds outstanding.

All of the above are true.


(TCO 5) Retained earnings has a cost associated with it because: (4 points)

new funds must be raised.

there is an opportunity cost associated with stockholder funds.

Ke> g

flotation costs increase the cost of funding.

Week 6 Lecture

(TCO 5) Which of the following is true regarding the cost of retained earnings?(4 points)

it is irrelevant to the WACC

requires new funds to be raised

need to be adjusted for the flotation costs

have a cost, which is the opportunity cost associated with stockholder funds

Week 6 Lecture

(TCO 5) Which of the following is not true regarding the cost of retained earnings?(4 points)

it is relevant to the WACC

does not require new funds to be raised

has associated flotation costs

has a cost, which is the opportunity cost associated with stockholder funds

Week 6 Lecture

(TCO 4) A project has the following cash flows. What is the internal rate of return?

Year 0 1 2 3

Cash flow -$195,600 $99,800 $87,600 $75,300

(4 points)

less than 5%

between 5 and 15%

between 15 and 18%

more than 21%


Answer: For this problem, you need to use the approximation method on Example 8.3 of your text, page 243 or a financial calculator. If you use the approximation method, the net present value at the IRR should equal zero. This value is 17.23%


Year 0 1 2 3

Cash flow

-$443,600

$224,800

$224,800

$67,200

(4 points)

less than 7%

between 8 and 11%

more than 13%

exactly 15%




Year 0 1 2 3

Cash flow

-$520,000

$112,900

$367,200

$204,600

(4 points)

less than 10%

approximately 14%

more than 16%

more than 18% but less than 20%



(TCO 5, 6 and 7) Which one of the following is a correct statement?(4 points)

Current tax laws favor debt financing.

A decrease in the dividend growth rate increases the cost of equity.

An increase in the systematic risk of a firm will decrease the firm's cost of capital.

A decrease in a firm's debt-equity ratio will usually decrease the firm's cost of capital.

The cost of preferred stock decreases when the tax rate increases.


(TCO 5, 6 and 7) All else constant, the weighted average cost of capital for a firm will decrease if:(4 points)

a firm's bonds start selling at a premium, rather than at a discount.

the market risk premium increases.

the firm replaces some of its debt with preferred stock.

corporate taxes are eliminated.

the dividend yield on the common stock increases.


(TCO 5, 6 and 7) Which one of the following is a correct statement regarding a firm's weighted average cost of capital (WACC)?(4 points)

the WACC can be used as the required return for all new projects.

the WACC of a leveraged firm will decrease when the tax rate decreases.

an increase in the market risk premium will tend to decrease a firm's WACC.

the WACC is a starting point for the subjective approach to setting discount rates.

a reduction in the risk level of a firm will tend to increase the firm's WACC.


(TCO 5, 6 and 7) The nine percent preferred stock of Bean Coffee is selling for $39 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?(4 points)

17.97%

19.25%

23.08%

24.67%

25.65%

Chapter 12, Pages 384-385Rp = (.09 × $100) / $39 = .23077 = 23.08 percent

(TCO 5, 6 and 7) The six percent preferred stock of FKH Manufacturing is selling for $62 a share. What is the firm's cost of preferred stock, if the tax rate is 34 percent and the par value per share is $100?(4 points)

5.98%

7.06%

8.05%

9.68%

10.10%

Chapter 12, Pages 384-385Rp = (.06 × $100) / $62 = .09677 = 9.68 percent

(TCO 5, 6 and 7) The preferred stock of Blue Sky Air pays an annual dividend of $7.25 a share and sells for $54 a share. The tax rate is 35 percent. What is the firm's cost of preferred stock?(4 points)

8.56 percent

9.32 percent

11.85 percent

13.43 percent

14.47 percent

Chapter 12, Pages 384-385 Rp = $7.25 / $54 = .13426= 13.43 percent

(TCO 2) Which one of the following statements is true concerning a bankruptcy?(4 points)

a Chapter 7 bankruptcy is a reorganization proceeding.

a "prepack" is intended to shorten the time a firm spends in bankruptcy.

the absolute priority rule applies to both Chapter 7 and Chapter 11 bankruptcy proceedings, and must be adhered to by the courts.

creditors cannot force a firm into bankruptcy, even though they might like to do so.

a reorganization plan, can only be approved if the firm's creditors all agree with the plan.


(TCO 2) The bankruptcy process has been utilized by firms as a means of:(4 points)

renegotiating labor contracts.

reducing labor costs.

avoiding payment of a legal judgment.

improving the firm's competitive position.

all of the above


(TCO 2) Which one of the following occurs if a firm files for Chapter

7 bankruptcy, but does not generally occur if the firm files for Chapter 11 bankruptcy?(4 points)

a petition is filed in federal court

administrative fees are incurred

a list of creditors is compiled

pre-bankruptcy shareholders tend to lose part, if not all, of their investment in the firm

a trustee-in-bankruptcy is elected by the creditors


(TCO 5) Which of the following statements is true regarding the cost of capital?(4 points)

The cost of capital should not consider any flotation costs.

All other being equal, it is preferable to use book value weights than market value weights.

The WACC is the most appropriate discount rate for all projects.

Depends primarily on the use of the funds, not the source.

Week 6 Lecture, Chapter 12

(TCO 5) Which of the following statements is false regarding the cost of capital?(4 points)

The cost of capital should consider the flotation costs.

All other being equal, it is preferable to use market value weights than book value weights.


Should include the cost of retained earnings.


(TCO 5) Which of the following statements is true regarding the cost of capital?(4 points)

All other being equal, it is preferable to use market value weights than book value weights


Should not include the cost of retained earnings.

Depends primarily on the source of the funds, not the use.


(TCO 2) Select any actions that do not affect the cash account.(4 points)

Goods are sold cash

An interest payment on a notes payable is made

A payment due is received from a client

Dividends are paid to shareholders

Inventory is purchased and paid for with credit


(TCO 2) Which of the following decreases the cash account?(4 points)


Dividends are paid to shareholders

Raw materials are purchased and paid for with credit

A new machine is purchased and paid for with the business line of credit


(TCO 2) Which of the following increases the cash account?(4 points)

Goods are sold on credit

An interest payment on a notes payable is made


Raw materials are purchased and paid for with credit


(TCO 2) Which of the following statements is true?(4 points)

The optimal credit policy minimizes the total cost of granting credit.

Firms should avoid offering credit at all cost.

An increase in a firm's average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.

Character, refers to the ability of a firm to meet its credit obligations out its operating cash flows.

The optimal credit policy, is the policy that produces the largest amount of sales for a firm.


(TCO 2) Which of the following statements is true? (4 points)

Firms should avoid offering credit at all cost.

An increase in a firm's average collection period generally indicates that an increased number of customers are taking advantage of the cash discount.

The costs of the credit application process and the costs expended in the collection process are carrying costs of granting credit.




(TCO 2) Which of the following statements is true? (4 points)

There is an opportunity cost associated with not offering credit.

The costs of the credit application process and the costs expended in the collection process are not carrying costs of granting credit.




(TCO 2) Which one of the following credit terms is most apt to produce the shortest accounts receivable period?(4 points)

net 25

net 10

1/10, net 30

3/10, net 15

2/20, net 45


(TCO 2) All else constant, a decrease in the accounts receivable period will:(4 points)

lengthen the accounts payable period.

shorten the inventory period.

lengthen the operating cycle.

shorten the cash cycle.

shorten the accounts payable period.

Chapter 17, Page 541-543

(TCO 2) Which one of the following industries is most apt to have the shortest cash cycle?(4 points)

electric utility company

airplane manufacturer

fast-food restaurant

furniture store

clothing manufacturer


(TCO 2) Delphinia's has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. What is the expected accounts receivable balance at the end of the second quarter? Assume each month has 30 days.

Q1 Q2 Q3 Q4

Sales $1,800 $1,700 $2,100 $1,900

(4 points)

$567

$600

$821

$1,134

$1,200

Q2 accounts receivable balance = (30 / 90) &#-41; $1,700 = $567

(TCO 2) The Yellow Box 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.

Q1 Q2 Q3 Q4

Sales $1,200 $1,400 $1,800 $1,700

(4 points)

$600

$750

$900

$1,050

$1,200

Q3 accounts receivable balance = (45 / 90) &#-41; $1,800 = $900

(TCO 2) Highland, Inc. has the following estimated quarterly sales for next year. The accounts receivable period is 30 days. How much does the firm expect to collect in the fourth quarter? Assume that each month has 30 days.

Q1 Q2 Q3 Q4

Sales $3,200 $4,500 $4,400 $2,900

(4 points)

$3,250

$3,400

$3,600

$3,750

$3,900

Q4 collections = (30/90) &#-41; $4,400 + (60/90) &#-41; $2,900 = $1,466.67 + $1,933.33 = $3,400

(TCO 1) Which of the following statements is true regarding the goal of financial management?(4 points)

The goal of maximizing the value per share of existing stock is relevant to all organizations.

The ultimate goal of financial management is maximizing earnings and profits.

For a company considering international operations, the goal will be the same but the company will have to consider the local, social, economical, and political environment in the decision-making process.

None of the above are true statements.

Chapter 1, pages 10-11

(TCO 1) Which one of the following actions best matches the primary goal of financial management?(4 points)

increasing the net, working capital while lowering the long-term asset requirements

improving the operating efficiency, thereby increasing the market value of the stock

increasing the firm’s market share

reducing fixed costs and increasing variable costs

increasing the liquidity of the firm by transferring short-term debt into long-term debt


(TCO 1) Why is maximization of the current value per share a more appropriate financial management goal than profit maximization?(4 points)

Because by maximizing the current stock value, you also maximize the company’s profit for the year.

Because this criterion is non-ambiguous.

Because financial managers always act in the best interest of shareholders.

Because it creates short-term gains in the financial statements.


(TCO 1) Which of the these activities is a capital budgeting task?(4 points)

determining the amount of cash needed on a daily basis to operate a firm

. identifying assets that produce value in excess of the cost to acquire those assets

establishing the inventory level

establishing a new credit policy

Chapter 1, Page 5, Week 1 Lecture

M (TCO 3) You deposited $8,000 in your bank account today. Which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (4 points)

a decrease in the interest rate

increasing the initial amount of your deposit

decreasing the frequency of the interest payments

extending the length of the investment period


M (TCO 3) You deposited $11,000 in your bank account today. Which of the following will decrease the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that apply: (4 points)

a decrease in the interest rate

increasing the initial amount of your deposit

increasing the frequency of the interest payments

decreasing the length of the investment period


(TCO 1) Which one of the following activities best exemplify working capital management?(4 points)

Sale long-term bonds to raise funds for a new machine.

Determine the return of a potential project.

Calculate the cash flows for a project.

Manage payments to suppliers.


(TCO 1) Which of the following are capital structure concerns?

I. how to obtain short-term financingII. the company's financing mix III. the cost of fundsIV. how and where to raise money(4 points)

I and II

I, II and III

II, III and IV

I, III and IV

All of the above


M (TCO 3) You deposited $5,000 in your bank account today. An increase in which of the following will increase the future value of your deposit, assuming that all interest is reinvested? Assume the interest rate is a positive value. Select all that

apply: (4 points)

interest rate

initial amount of your deposit

frequency of the interest payments

length of the investment period


(TCO 1) Market values reflect which of the following:(4 points)

The amount someone is willing to pay today for an asset.

The value of the asset based on generally-accepted accounting principles.

The asset’s historical cost.

A and B only

None of the above

Chapter 2, Page 26

(TCO 1) Book values are different from market values because:(4 points)

Book values reflect the value of the asset based on generally-accepted accounting principles.

Book values are used in the company’s balance sheet.

Book values do not reflect the amount someone is willing to pay today for an asset.

All of the above

None of the above

Chapter 2, Page 26

(TCO 1) Market value is important to the financial manager because:(4 points)

It reflects the value of the asset based on generally-accepted accounting principles.

Is a crucial component of the balance sheet, and can impact the financial statements.

Market values reflect the amount someone is willing to pay today for an asset. The market value of an asset reflects its historical cost.


(TCO 1) Use the following tax table to answer this :

Taxable Income

Tax Rate

$0- $50,000

15%

$50,001-

75,000

25

$75,001-

100,000

34

$100,001-

335,000

39

$335,001-

10,000,0

00

34

John has taxable income of $389,745. What is John’s average tax rate?(4 points)

33%

34%

36%

37%

38%

Chapter 2, Page 33Total tax = ($50,000)(.15) + ($25,000)(.25) + ($25,000)(.34) + ($235,000)(.39) + ($389,745 − $335,000)(.34) = $132,513$132,513/389,745 = 33.99 = 34%


Taxable Income Tax Rate

$0- $50,000 15%

$50,001- 75,000 25

$75,01-

100,000 34

$100,001- 335,000 39

$335,001- 10,000,000 34

Riddell, Inc. earned $144,320 in taxable income for the year. How much tax does the company owe on this income?(4 points)

$39,535

$49,069

$51,285

$56,285

$78,535

Chapter 2, Page 33

Total tax = ($50,000)(.15) + ($25,000)(.25) + ($25,000)(.34) + ($144,320 − $100,000)(.39) = $39,535 $39,535


Taxable Income Tax Rate

$0-50,000

15%

$50,001- 75,000 25

$75,001- 100,000 34

$100,001- 335,000 39

$335,001- 10,000,000 34

Kenzie, Inc. earned $144,320 in taxable income for the year. What is the company’s approximate average tax rate?(4 points)

27%

29%

31%

33%

35%

Chapter 2, Page 33Total tax = ($50,000)(.15) + ($25,000)(.25) + ($25,000)(.34) + ($144,320 − $100,000)(.39) = $39,535 $39,535$39,535/$144,320=27.4%

(TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 19.50 percent for a new automobile loan. You should choose ______________ because its _______ is lower.(4 points)

Regional Bank, APR

Local Bank, EAR

Regional Bank, EAR

Local Bank, APR

Chapter 5, page 140

Answer: You need to compare the EAR. EAR for Regional Bank = (1+APR/m)^m – 1 = (1+0.19/2)^2 – 1 = 19.90%

(TCO 3) Regional Bank offers you an APR of 19 percent compounded semiannually, and Local Bank offers you an EAR of 20.10 percent for a new automobile loan. You should choose ______________ because its _______ is lower.(4 points)

Regional Bank, APR

Local Bank, EAR

Regional Bank, EAR

Local Bank, APR

Chapter 5, page 140


(TCO 3) Regional Bank offers you an APR of nine percent compounded quarterly, and Local Bank offers you an EAR of 9.15 percent for a new automobile loan. You should choose ______________ because its _______ is lower.(4 points)

Regional Bank, APR

Local Bank, EAR

Regional Bank, EAR

Local Bank, APR

Chapter 5, page 140


(TCO 3) Thirteen years from now, you will be inheriting $30,000. What is this inheritance worth to you today, if you can earn four percent interest compounded annually?(4 points)

$18,017.22

$20,741.87

$23,190.98

$26,359.88

$28,846.15

(TCO 3) You want to have $15,000 for a down payment on a house five years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?(4 points)

$7,858.11

$8,141.40

$9,803.58

$12,464.28

$14,213.25

(TCO 3) Amy needs to save $20,000 in cash to buy a new car five years from today. She expects to earn 6.5 percent, compounded annually, on her savings. How much does she need to deposit today, if this is the only money she saves for this purpose?(4 points)

$12,468.07

$12,502.14

$14,597.62

$17,044.32

$17,129.01

(TCO 3) Paper Pro needed a new store. The company spent $65,000 to refurbish an old shop and create the current facility. The firm borrowed 75 percent of the refurbishment cost at eight percent interest for 11 years. What is the amount of each monthly payment?(4 points)

$91.05

$284.13

$556.50

$682.87

$731.60

(TCO 3) High Risk Operations, Inc. owes your firm $52,800. This amount is delinquent, so you have offered to arrange a payment plan in the hopes that you might at least collect a portion, if not all, of this money. Your offer will consist of weekly payments for two years, at an interest rate of four percent. What is the amount of

(Current

each payment?

(TCO 3) The new home that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment?(4 points)

$2,291.89

$2,809.10

$3,287.46

$3,412.67

$4,145.68

(TCO 3) John borrowed $5,500 four years ago at an annual interest rate of 10 percent. The loan term is seven years. Since he borrowed the money, Sonny has been making annual payments of $550 to the bank. Which type of loan does John have?(4 points)

interest-only

pure discount

compounded

amortized

complex


(TCO 3) Amy borrowed $5,000 from her bank three years ago. The loan term is five years. Each year, Amy must repay the bank $1,000 plus the annual interest. Which type of loan does Amy have?(4 points)

amortized

blended discount

interest-only

pure discount

complex


(TCO 3) Which type of loan is comparable to the present value of a future lump sum?(4 points)

effective annual rate

amortized

interest-only

annual percentage

pure discount


(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond, if the YTM is 11 percent? Assume annual payments.(4 points)

$1080

$1085

$925

$1000

Chapter 6 Pages 163-166, Week 3 Lecture Determine coupon/interest payments = $1,000 x 12% = $120PV of interest payments (as an annuity) = $120 x 8.422 = $1010.64 (25 periods, 11% rate)PV of principal (single amount) = $1000 x 0.074 = $74Total = $1010.64 + $74 = $1,084.64

(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 13 percent? Assume annual payments.(4 points)

$1078

$1085

$927

$1000

Chapter 6 Pages 163-166, Week 3 Lecture Determine coupon/interest payments = $1,000 x 12% = $120PV of interest payments (as an annuity) = $120 x 7.33 = $879.60 (25 periods, 13% rate)PV of principal (single amount) = $1000 x 0.047 = $47Total = $879.60 + $47 = $926.60

(TCO 3) Fanta Cola has $1,000 par value bonds outstanding at 12 percent interest. The bonds mature in 25 years. What is the current price of the bond if the YTM is 16 percent? Assume annual payments.(4 points)

$1315

$1300

$756

$1000

Chapter 6 Pages 163-166, Week 3 Lecture Determine coupon/interest payments = $1,000 x 12% = $120PV of interest payments (as an annuity) = $120 x 6.097= $731.64 PV of principal (single amount) = $1000 x 0.024 = $24Total = $731.64 + $24 = $755.64

(TCO 6) Which of the following is true regarding the primary market?(4 points)

it is the market where the largest number of shares are traded on a daily basis.

it is the market in which the largest number of issues are listed.

it is the market with the largest number of participants.

it is the market where new securities are offered.

it is the market where shareholders trade most frequently with each other.

Chapter 7 Page 216

(TCO 6) The market where one shareholder sells shares to another shareholder is called the _____ market.(4 points)

primary

main

secondary

principal

dealer

Chapter 7 Page 216

(TCO 6) The market where new securities are offered is called the _____ market.(4 points)

primary

main

secondary

principal

dealer

Chapter 7 Page 216

(TCO 7) Which one of the following statements concerning financial leverage is correct?(4 points)

The benefits of leverage are unaffected by the amount of a firm's earnings.

The use of leverage will always increase a firm's earnings per share.

The shareholders of a firm are exposed to greater risk anytime a firm uses financial leverage.

Earnings per share are unaffected by changes in a firm's debt-equity ratio.

Financial leverage is beneficial to a firm only when the firm has minimal earnings.


(TCO 7) Which one of the following statements concerning financial leverage is correct?(4 points)

Financial leverage increases profits and decreases losses.

Financial leverage has no effect on a firm's return on equity.

Financial leverage, refers to the use of common stock.

Financial leverage magnifies both profits and losses.

Increasing financial leverage will always increase the earnings per share.


(TCO 7) A taxpaying, levered firm's optimal capital structure:(4 points)

is 100 percent equity financing.

consists of equal amounts of debt and equity financing.

is the mixture of debt and equity financing that minimizes the firm's aftertax cost of debt.

is the mixture of debt and equity financing that minimizes the weighted average cost of capital.

is 100 percent debt financing.


(TCO 3) A 10-year bond pays 11 percent interest on a $1000 face value annually. If it currently sells for $1,195, what is its approximate yield to maturity?(4 points)

9.33%

7.94%

12.66%

8.10%

Week 3 LectureUse the trial and error approach or the formula provided on the lecture for an approximation.

Using the formula = See week 3 formula

Approximate YTM = [$110+($1000-1195/10)]/[(0.6*1195)+(0.4x1000)] = $90.50/1,117 = 8.10%

(TCO 3) What is the approximate yield to maturity for a seven-year bond that pays 11 percent interest on a $1000 face value annually if the bond sells for $952?(4 points)

10.5%

10.6%

11.5%

12.1%


Using the formula = See lecture in week 3

Approximate YTM = [$110+($1000-952/7)]/[(0.6*952)+(0.4x1000)] = $117/971 = 12.1%

(TCO 3) SmithKline Company's bonds are currently selling for $1,157.75 per $1000 par-value bond. The bonds have a 10 percent coupon rate and will mature in 10 years. What is the approximate yield to maturity?(4 points)

6.96%

7.69%

11.0%

12.1%


Using the formula = see week 3 lecture

Approximate YTM = [$100+($1000-1157.75/10)]/[(0.6*1157.75)+(0.4x1000)] = $84.23/1094.65 = 7.69%

(TCO 8) Which of the following is true regarding bonds?(4 points)

Bonds do not carry default risk.

Bonds are sensitive to changes in the interest rates.

Moody’s and Standard and Poor’s provide information regarding a bond’s interest rate risk.

Municipal bonds are free of default risk.


Week 3 Lecture


Bonds do not carry default risk.

Bonds are not sensitive to changes in the interest rates.


Municipal bonds are not free of default risk.


Week 3 Lecture


Most bonds do not carry default risk.

Municipal bonds are free of default risk.

Bonds are not sensitive to changes in the interest rates.



Week 3 Lecture

(TCO 8) Two years ago, Maple Enterprises issued six percent, 20-year bonds and Temple Corp issued six percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk?(4 points)

Maple's decreased more than Temple's

Temple's decreased more than Maple's

Maple's increased more than Temple's

They are both priced the same

Chapter 6, Page 167

(TCO 8) Which one of the following bonds is the most sensitive to interest rate movements? (4 points)

zero-coupon, five year

seven percent annual coupon, five year

zero-coupon, 10 year

five percent semi-annual coupon, 10 year

five percent annual coupon, 10 year

Chapter 6, Page 167

(TCO 8) Two years ago, MorningStar Company issued seven percent, 25-year bonds and Track, Inc. issued seven percent, 10-year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm's bond prices in the market, assuming they have equal risk?(4 points)

Track's decreased more than Morningstar's

Morningstar's increased more than Track's

Morningstar's decreased more than Track's

They are both priced the same

Chapter 6, Page 167

(TCO 6) A sinking fund is an account managed by a bond trustee for the sole purpose of:(4 points)

paying interest payments on a semi-annual basis.

redeeming bonds early.

repaying the face value at maturity.

paying the expenses required to reissue outstanding bonds.

paying the "balloon payment" at maturity.

Chapter 6, Page 167

(TCO 6) A call provision in a bond agreement grants the issuer the right to:(4 points)

repurchase the bonds prior to maturity at a pre-specified price.

replace the bonds with equity securities.

repurchase the bonds after maturity at a pre-specified price.

change the coupon rate, provided the bondholders are notified in advance.

buy back the bonds on the open market prior to maturity.

Chapter 6, Page 176

(TCO 6) Star Industries has one bond issue outstanding. An indenture provision prohibits the firm from redeeming the bonds during the first two years. This provision is referred to as a _____ provision.(4 points)

deferred call

market

liquidity

debenture

sinking fund

Chapter 6 Page 176

(TCO 6) Which of the following is true regarding put bonds?(4 points)

Have coupons that depend on the company’s income

Can be exchanged for a fixed number of shares before maturity only

Can be exchanged for a fixed number of shares before maturity

Allow the holder to require the issuer to buy the bond back

(TCO 1) Provide three examples of situations in which business ethics play a role in the financial management process. Explain your rationale, and how these situations may affect the value of the firm. (10 points)

Chapter 1, Pages 10-12- environmental clean-up- employee safety programs - outsourcing and offshoring - move operations to foreign countries for tax advantages - downsizing / cut jobs to increase shareholder value Students should recognize the costs and benefits of each example.

(TCO 1) Provide three examples of recent well-known unethical behavior cases. Explain the situation in one or two paragraphs. How do you believe that this behavior affected the firm’s value?(10 points)

Week 1 Lecture. - Parmalat’s fraudulent accounting practices- Martha Stewart’s insider trading on Ilone- Microsoft antitrust case - Worldcom, Enron, TycoStudents should recognize that these types of situations may result in bankruptcy or penalties for corporate management.

(TCO 6) Which of the following is true regarding income bonds?(4 points)

Are relatively uncommon

Can be exchanged for a fixed number of shares at maturity only



Chapter 6 Page 182

(TCO 6) Which of the following is true regarding convertible bonds?(4 points)

Are relatively uncommon

Can be exchanged for a fixed number of shares after the maturity only



Chapter 6 Page 182

(TCO 1) Recent announcements of massive layoffs have increased stock prices for certain companies. Critics argue that this reaction encourages companies to fire employees. Do you agree or disagree?(10 points)

Chapter 1, Pages 10-12.

Such layoffs generally occur in the context of corporate restructurings. To the extent that the market views a restructuring as value-creating, stock prices will rise. So, it’s not the layoffs per se that are being cheered on, but the cost savings associated with the layoffs. Nonetheless, Wall Street does encourage corporations to take actions to create value, even if such actions involve layoffs. It is an ethical decision of the company’s managers.

(TCO 4) What are sunk costs? Provide at least two real-life examples of sunk costs for a project. Should sunk costs be included as incremental cash flows? Why or why not? Explain your rationale.(10 points)

Chapter 9, Page 269Some examples of sunk costs will include the marketing costs related to launching a new product into the market, or research and development costs on a pharmaceutical product. Sunk costs are not incremental, and therefore, not relevant to the decision at hand. Sunk costs are incurred regardless of the decision of accepting or rejecting a project and therefore, should not be included as part of the project cash flows.

(TCO 6 and 7) Financial leverage deals with:(4 points)

the relationship of fixed and variable costs.

the percentage of debt in the capital structure.

the entire income statement.

the entire balance sheet.

Chapter 2, Page 26

(TCO 6 and 7) The term debenture refers to(4 points)

long-term, secured debt.

long-term, unsecured debt.

the after-acquired property clause.

a document covering the specific terms of the debt issue.

Chapter 6, Page 175

(TCO 4) What are erosion costs? Provide one real-life example of an erosion cost for a project. Should erosion costs be included as project cash flows? Why or why not? Explain your rationale.(10 points)

Chapter 9, Page 269General Motors' decision of launching a new car into the market can negatively affect an existing model. The lost sales should be included in the project analysis process, and cash flows should be adjusted to reflect the declining sales on other models.

(TCO 4) What is an opportunity cost? Provide two real-life examples of opportunity costs for a project. Should opportunity costs be included in the project analysis process? Why or why not? Explain your rationale. (10 points)

Chapter 9, Page 269Opportunity costs are the most valuable alternative that is given up if a particular investment is undertaken. A typical example is the use of land or buildings. Even if we own these properties, their use is not free. We could alternatively lease or sell the assets. Opportunity costs need to be included into the project analysis process.

(TCO 6 and 7) The document that outlines the covenants and duties existing between

bondholders and the issuing corporation is called(4 points)

an indenture.

a debenture.

secured debt.

protective covenants.

Chapter 6, Page 174

(TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820 and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s coupon rate and current yield, respectively?(4 points)

11% and 9%

9% and 11%

9% and 14%

Cannot be determined

None of the above


Answer: Coupon Rate = $90/1,000 = 9%Current yield = $90/820 = 10.98% = 11%

(TCO 8) Consider the following statement: “Any risk is diversifiable”. Do you agree or disagree? Why?(10 points)

Chapter 11, Pages 350-353Some of the risk in holding any asset is unique to the asset in . By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the other hand, there are systematic risks that affect all investments. This portion of the total risk of an asset cannot be costlessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns.

(TCO 8) What is the difference between systematic and unsystematic risk? Provide one example of each. Can both systematic and unsystematic risks be diversified? Why or why not? (10 points)

Chapter 11, Pages 350-353Some of the risk in holding any asset is unique to the asset in ; these are unsystematic risks. On the other hand, systematic risks such as inflation or interest rates, have market-wide effects. By investing in a variety of assets, only the unsystematic portion of the total risk can be eliminated at little cost.

(TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond’s yield to maturity?(4 points)

9%

14%

11%


None of the above


Using the formula = See lecture in week 3

Approximate YTM = [$90+($1000-820/5)]/[(0.6*820)+(0.4x1000)] = $126/892 = 14.13%

(TCO 6) Company A has a bond outstanding with $90 annual interest payment, a market price of $820, and a maturity date in five years. Assume the par value to be $1,000. What is the bond's current yield?(4 points)

9%

14%

11%


None of the above


Answer: Current yield = $90/820 = 10.98% = 11%

(TCO 8) What is the difference between business risk and financial risk? If Company A has a higher business risk than Company B, should its cost of capital be higher? Why or why not? Explain your rationale. (10 points)


Business risk, is the equity risk arising from the nature of the firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. Financial risk, is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt financing, increases, so does financial risk and hence the overall risk of the equity. Thus, Company B could have a higher cost of equity if it uses greater leverage.

(TCO 2) What are some important factors to consider when conducting a credit evaluation and scoring? (10 points)


Answers will vary, but students should relate to credit information, as well as the five Cs of credit.

(TCO 2) Which of the following does not reduce collection float?(4 points)

installing a lockbox system.

deposit collections weekly, instead of daily.

requiring all customers pay by cash, rather than with check.

utilize the benefits of the Check Clearing Act for the 21stCentury.


(TCO 2) Which one of the following practices will reduce a firm's collection float? (4 points)

utilizing zero-balance accounts

depositing checks weekly, rather than daily

requiring all customers pay by check, rather than with cash

installing a lockbox system

paying all bills five days sooner


(TCO 2) What are the costs associated with extending (or not extending) a credit policy to customers?(10 points)


The costs of granting credit are carrying costs, specifically the cost of debt, possibility of default, and the cash discount. The major cost of not grating credit is the opportunity cost of lost sales. The sum of these costs for different levels of receivables creates the total credit cost curve.

(TCO 2) What are some important elements of the collection policy? (10 points)

Chapter 17, Pages 547-548Monitoring receivables through aging schedules, conduct collection efforts such as sending out delinquency letters, following up by phone or email, contracting a collection agency, and taking legal action against customers.

(TCO 2) Which of the following does not reduce collection float?(4 points)

consolidate all lockboxes into one lockbox, located near the home office.

consolidate all lockboxes into one lockbox, located far from the home office.

make sure all checks it receives are properly dated and signed.

utilize the benefits of the Check Clearing Act for the 21st Century.


(TCO 2) Storage and tracking costs, insurance and taxes, and losses due to theft are examples of:(4 points)

Inventory depletion costs

Sunk costs

Inventory costs

None of the above


Education

DeVry BUSN379 Final Exam Study Questions and Answers