A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)
Companies HD and LD have identical tax rates, total assets, and basic earning power ratios, and their basic earning power exceeds their before-tax cost of debt, r. However, Company HD has a higher debt ratio and thus more interest expense than Company LD. Which of the following statements is CORRECT?
Company HD has a higher net income than Company LD.
Company HD has a lower ROA than Company LD.
Company HD has a lower ROE than Company LD.
The two companies have the same ROA.
The two companies have the same ROE.
Edison Inc. has annual sales of $49,000,000, or $44,100,000 a day on a 365-day basis. The firm's cost of goods sold are 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.
Assume that you and your brother plan to open a business that will make and sell a newly designed type of sandal. Two robotic machines are available to make the sandals, Machine A and Machine B. The price per pair will be $19.50 regardless of which machine is used. The fixed and variable costs associated with the two machines are shown below. What is the difference between the breakeven points for Machines A and B? (Hint: Find BEB - BEA)
Price per pair (P)
Fixed costs (F)
Variable cost/unit (V)
Firms U and L each have the same amount of assets, and both have a basic earning power ratio of 20%. Firm U is unleveraged, i.e., it is 100% equity financed, while Firm L is financed with 50% debt and 50% equity. Firm L's debt has a before-tax cost of 8%. Both firms have positive net income. Which of the following statements is CORRECT?
The two companies have the same times interest earned (TIE) ratio.
Firm L has a lower ROA than Firm U.
Firm L has a lower ROE than Firm U.
Firm L has the higher times interest earned (TIE) ratio.
Firm L has a higher EBIT than Firm U.
Fauver Industries plans to have a capital budget of $650,000. It wants to maintain a target capital structure of 40% debt and 60% equity, and it also wants to pay a dividend of $375,000. If the company follows the residual dividend policy, how much net income must it earn to meet its investment requirements, pay the dividend, and keep the capital structure in balance?
Becker Financial recently declared a 2-for-1 stock split. Prior to the split, the stock sold for $85 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split?
A major contribution of the Miller model is that it demonstrates, other things held constant, that
personal taxes increase the value of using corporate debt.
personal taxes lower the value of using corporate debt.
personal taxes have no effect on the value of using corporate debt.
financial distress and agency costs reduce the value of using corporate debt.
debt costs increase with financial leverage.
A firm's CFO is considering increasing the target debt ratio, which would also increase the company's interest expense. New bonds would be issued and the proceeds would be used to buy back shares of common stock. Neither total assets nor operating income would change, but expected earnings per share (EPS) would increase. Assuming the CFO's estimates are correct, which of the following statements is CORRECT?
Since the proposed plan increases the firm's financial risk, the stock price might fall even if EPS increases.
If the plan reduces the WACC, the stock price is likely to decline.
Since the plan is expected to increase EPS, this implies that net income is also expected to increase.
If the plan does increase the EPS, the stock price will automatically increase at the same rate.
Under the plan there will be more bonds outstanding, and that will increase their liquidity and thus lower the interest rate on the currently outstanding bonds.
Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?
Annual sales =
Annual cost of goods sold =
Accounts receivable =
Accounts payable =
Companies HD and LD have the same total assets, operating income (EBIT), tax rate, and business risk. Company HD, however, has a much higher debt ratio than LD. Also, both companies' basic earning power (BEP) ratios exceed their cost of debt (r). Which of the following statements is CORRECT?
HD should have a higher return on assets (ROA) than LD.
HD should have a higher times interest earned (TIE) ratio than LD.
HD should have a higher return on equity (ROE) than LD, but its risk, as measured by the standard deviation of ROE, should also be higher than LD's.
Given that BEP > r, HD's stock price must exceed that of LD.
Given that BEP > r, LD's stock price must exceed that of HD.
Cass & Company has the following data. What is the firm's cash conversion cycle?
Inventory Conversion Period =
Receivables Collection Period =
Payables Deferral Period =
Buskirk Construction buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $650,000 per year. On average, how much “free” trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)
Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 115 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
Firms generally choose to finance temporary current assets with short-term debt because
matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
short-term interest rates have traditionally been more stable than long-term interest rates.
a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
the yield curve is normally downward sloping.
short-term debt has a higher cost than equity capital.
Firm M is a mature company in a mature industry. Its annual net income and net cash flows are consistently high and stable. However, M's growth prospects are quite limited, so its capital budget is small relative to its net income. Firm N is a relatively new company in a new and growing industry. Its markets and products have not stabilized, so its annual operating income fluctuates considerably. However, N has substantial growth opportunities, and its capital budget is expected to be large relative to its net income for the foreseeable future. Which of the following statements is CORRECT?
Firm M probably has a lower target debt ratio than Firm N.
Firm M probably has a higher target dividend payout ratio than Firm N.
If the corporate tax rate increases, the debt ratio of both firms is likely to decline.
The two firms are equally likely to pay high dividends.
Firm N is likely to have a clientele of shareholders who want a consistent, stable dividend income.
A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 75 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
Data on Shick Inc. for 2008 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.
Days Sales Outstanding (DSO)
Benchmarks' Days Sales Outstanding (DSO)
A lockbox plan is most beneficial to firms that
have suppliers who operate in many different parts of the country.
have widely disbursed manufacturing facilities.
have a large marketable securities portfolio, and cash, to protect.
receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
have customers who operate in many different parts of the country.
Confu Inc. expects to have the following data during the coming year. What is the firm's expected ROE?
Debt/Assets, book value
Grullon Co. is considering a 7-for-3 stock split. The current stock price is $67.50 per share, and the firm believes that its total market value would increase by 5% as a result of the improved liquidity that should follow the split. What is the stock's expected price following the split?
Gator Fabrics Inc. currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company is considering using some debt, moving to the new debt/assets ratio indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the WACC change, i.e., what is WACC - WACC?
Orig cost of equity, rs
New cost of equity = rs
Interest rate new = rd
Data on Wentz Inc. for 2008 are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year.
Cost of goods sold =
Payables Deferral Period (PDP) =
Benchmark Payables Deferral Period =
A group of venture investors is considering putting money into Lemma Books, which wants to produce a new reader for electronic books. The variable cost per unit is estimated at $250, the sales price would be set at twice the VC/unit, or $500, and fixed costs are estimated at $675,000. The investors will put up the funds if the project is likely to have an operating income of $500,000 or more. What sales volume would be required in order to meet the minimum profit goal? (Hint: Use the breakeven formula, but include the required profit in the numerator.)
Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?
Annual sales =
Annual cost of goods sold =
Accounts receivable =
Accounts payable =
Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm’s annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $39,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
Business risk is affected by a firm's operations. Which of the following is NOT directly associated with (or does not directly contribute to) business risk?
Sales price variability.
The extent to which operating costs are fixed.
The extent to which interest rates on the firm's debt fluctuate.
Input price variability.
El Capitan Foods has a capital structure of 40% debt and 60% equity, its tax rate is 35%, and its beta (leveraged) is 1.15. Based on the Hamada equation, what would the firm's beta be if it used no debt, i.e., what is its unlevered beta?
Based on the information below, what is the firm's optimal capital structure?
Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.
Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.
Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.
Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.
Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.
Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?
Net income (NI)
Companies HD and LD have identical amounts of assets, operating income (EBIT), tax rates, and business risk. Company HD, however, has a higher debt ratio than LD. Company HD's basic earning power ratio (BEP) exceeds its cost of debt (r). Which of the following statements is CORRECT?
Company HD has a higher return on assets (ROA) than Company LD.
Company HD has a higher times interest earned (TIE) ratio than Company LD.
Company HD has a higher return on equity (ROE) than Company LD, and its risk as measured by the standard deviation of ROE is also higher than LD's.
The two companies have the same ROE.
Company HD's ROE would be higher if it had no debt.
A lockbox plan is
used to protect cash, i.e., to keep it from being stolen.
used to identify inventory safety stocks.
used to slow down the collection of checks our firm writes.
used to speed up the collection of checks received.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Dyl Pickle Inc. had credit sales of $3,600,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year.