B3 Capital Management

Question 1

The overall cost of capital is the:

a.
Rate of return on assets that covers the costs associated with the funds employed.

b.
Minimum rate a firm must earn on high-risk projects.

c.
Cost of the firm’s equity capital at which the market value of the firm will remain unchanged.

d.
Maximum rate of return on assets.

Answer 1

A) Rate of return on assets that covers the cost associated with the funds employed.

Question 2

The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

a.
High marginal tax rates and few noninterest tax benefits.

b.
Low marginal tax rates and few noninterest tax benefits.

c.
High marginal tax rates and many noninterest tax benefits.

d.
Low marginal tax rates and many noninterest tax benefits.

Answer 2

Choice “a” is correct. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few noninterest tax benefits (because there is little or no reason to depart from debt financing).

Question 3

CPA-04809

Minon, Inc. purchased a long-term asset on the last day of the current year. What are the effects of this purchase on return on investment and residual income?

Return on
Investment

Residual
income

a.
Increase

Increase

b.
Decrease

Decrease

c.
Increase

Decrease

d.
Decrease

Increase

Answer 3

Choice “b” is correct. The addition of an asset at year end serves to reduce both return on investment and residual income. The addition of an asset increases then denominator in the ROI computation and increases the threshold earnings required using the residual income approach. Both measures would suffer as a result of addition of assets.

Question 4

Cost of quick payment discounts formula

Answer 4

360/(pay period-discount period)* discount/(100-discount %)

Question 5

Define Lockbox systems

Answer 5

having a bank receive payments from a company’s customer directly via mailboxes

good if additional interest income>bank fees

Question 6

Cash conversion cycle formula

Answer 6

of days to sell + # of days to collect - # of days to pay vendor

Question 7

Define Cash conversion cycle

Answer 7

avg. # of days to create cash from core business

Question 8

Formula for inventory conversion period

Answer 8

365/inventory turnover (COGS/Average Inventory)

Question 9

Formula for inventory turnover

Answer 9

(COGS/Average Inventory)

Question 10

Accounts Receivable turnover

Answer 10

sales/ average AR

Question 11

Formula for Receivables collection period

Answer 11

365/Accounts receivables turnover

Question 12

Payables deferral period formula

Answer 12

365/ AP turnover

Question 13

Accounts payable turnover

Answer 13

cogs/ average AP

Question 14

Which one of the following would increase the working capital of a firm?

a.
Cash collection of accounts receivable.

b.
Refinancing of accounts payable with a two-year note payable.

c.
Cash payment of accounts payable.

d.
Payment of a thirty-year mortgage payable with cash

Answer 14

Choice “b” is correct. Working capital (WC) increases only if current assets are increased or current liabilities are decreased. Exchanging accounts payable (current liability) for a two-year note payable (long-term liability) would decrease current liabilities and increase working capital.

Choice “a” is incorrect. This would not impact WC.

Choice “c” is incorrect. This would not have an impact on WC (decrease of both CA and CL).

Choice “d” is incorrect. This would decrease WC.

Question 15

Which of the following transactions would increase the current ratio and decrease net profit?

a.
A federal income tax payment due from the previous year is paid.

b.
A long-term bond is retired before maturity at a discount.

c.
A dividend is paid.

d.
Vacant land is sold for less than the net book value

Answer 15

Choice “d” is correct. The current ratio is current assets divided by current liabilities. The sale of land would increase cash and therefore current assets without increasing current liabilities. This would increase the current ratio. Furthermore, the sale of land at a loss would decrease net profit.

Choice “a” is incorrect. The payment of a tax payment would not decrease net profit because the expense was accrued last year.

Choice “b” is incorrect. The use of cash to retire a long-term bond would reduce current assets without reducing current liabilities. This would reduce the current ratio.

Choice “c” is incorrect. As above, this would reduce cash without reducing current liabilities

Question 16

Garo Company, a retail store, is considering foregoing sales discounts in order to delay using its cash. Supplier credit terms are 2/10, net 30. Assuming a 360-day year, what is the annual cost of credit if the cash discount is not taken and Garo pays net 30?

a.
24. 0 percent.

b.
24. 5 percent.

c.
36. 0 percent.

d.
36. 7 percent

Answer 16

Choice “d” is correct. 36.7% annual cost of credit if cash discount is not taken.