Chapter 3 Hard questions

Question 1

Management at MDK Corp. is deciding whether to replace a delivery van. A new delivery van costing $40,000 can be purchased to replace the existing delivery van, which cost the company $30,000 and has accumulated depreciation of $20,000. An employee of MDK has offered $12,000 for the old delivery van. Ignoring income taxes, which of the following correctly states relevant costs when making the decision whether to replace the delivery vehicle?

Answer 1

Purchaise price of new van, disposal price of old van.

Relevant costs ar eonly dpeendant on selection of an alternative decision. Things like gain on sale, old purchase price, accumualted depreciation - these are not relevant costs

Question 2

Which of the following ratios would most likely be used by management to evaluate short-term liquidity?

Answer 2

acid ratio. You were close: picked sales-to-cash

rmeember sales over cash doesnt measure liquidity

Question 3

A company recently issued 9% preferred stock. The preferred stock sold for $40 a share with a par of $20. The cost of issuing the stock was $5 a share. What is the company’s cost of preferred stock

Answer 3

5.1%

Its the preferred dividend of 1.8 over the cost of issuing shares of 35: (40SP -5 costs)

that is 5.1%

At first you divided it by the $5 first, then by 25…

Question 4

The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25 and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage represents the firm’s cost of common equity?

Answer 4

Its 12 %.

The 5% calculated cost of stock plus the rate its expected tog row at

Question 5

The profitability index is a variation on which of the following capital budgeting models?

Answer 5

net present value

Question 6

Which of the following methods should be used if capital rationing needs to be considered when comparing capital projects?

Answer 6

proftiabiltiy idnex

you thought it was ROI or NPV

Remember, PI is pv of cash flows/invest today. If resources are scarce, we’d want to pickthe investment with a hgher PI - it will have the highest rate of return

Question 7

debt ratio

Answer 7

short and Long-term Debt/Total Assets