FINM Flashcards
Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?
a. This market provides more funds at lower rates than other methods provide.
b. This market provides a broad distribution for borrowing.
c. There are no restrictions as to the type of corporation that can enter into this market.
d. The borrower avoids the expense of maintaining a compensating balance with a commercial bank.
There are no restrictions as to the type of corporation that can enter into this market.
Which of the following ratios is appropriate for the evaluation of accounts receivable’
a. Days’ sales outstanding.
b. Return on total assets.
c. Collection to debt ratio.
d. Current ratio.
Days’ sales outstanding.
A manufacturing company is attempting to implement a just-in-time (JIT) purchase policy system by negotiating with its primary suppliers to accept long-term purchase orders which result in more frequent deliveries of smaller quantities of raw materials. If the JIT purchase policy is successful in reducing the total inventory
costs of the manufacturing company, which of the following combinations of cost changes would be most likely to occur?
a. Purchasing costs increase, Stockout costs decrease
b. Purchasing costs increase Quality costs decrease
c. Quality costs increase Ordering costs decrease
d. Stockout cost increase Carrying costs decrease
Stockout cost increase Carrying costs decrease
At the end of September a company has outstanding accounts receivable of $350 on third-quarter credit sales, composed as follows:
Still outstanding at the
Month Credit sales end of September
July $600 $100
August 900 170
September 500 80
The percentage of receivables in the 31-to-60-day age group at the end of September is
48.57%
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 many noninterest tax benefits.
b. High marginal tax rates and few noninterest tax benefits.
c. Low marginal tax rates and few noninterest tax benefits.
d. Low marginal tax rates and many noninterest tax
High marginal tax rates and few noninterest tax benefits.
Which of the following assumptions is associated with the economic order quantity formula?
a. The cost of placing an order will vary with quantity ordered.
b. The carrying cost per unit will vary with quantity ordered.
c. Periodic demand is known.
d. The purchase cost per unit will vary based on quantity discounts.
Periodic demand is known.
Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet Bander’s financing requirements?
a. Short-term debt.
b. Bonds.
c. Long-term debt.
d. Common stock.
Common stock.
The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm’s net
cost of debt?
9.8%
A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers.
Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the
company at any point in time, assuming a 365-day year?
$45,205.48
A company has $650,000 of 10% debt outstanding and $500,000 of equity financing. The required return of the equity holders is 15% and there are no retained earnings currently available for investment purposes. If new outside equity is raised, it will cost the firm 16%. New debt would have before-tax cost of 9%, and the corporate tax rate is 50%. When calculating the marginal cost of capital, the company should assign a cost of to equity capital and to the after-tax cost of debt financing.
List A List B
a. 15% 4.5%
b. 15% 5.0%
c. 16% 4.5%
d. 16% 5.0%
16% 4.5%
Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of AmicabIes customers take the 2% discount and pay on day 10. The remainder of Amicable’s customers pay on day 30. How many days’ sales are in Amicable’s accounts receivable?
18
How would the following be used in the economic order quantity formula?
Inventory carrying cost Cost per purchase order
Denominator Numerator
Blue Co. sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory for one year is $8, and the purchase order cost per order is $32.
What is the economic order quantity?
400
The best reason corporations issue Eurobonds rather than domestic bonds is that
These bonds are normally a less expensive form of financing because of the absence of government regulation.
Which of the following is accurate regarding a company with a high degree of financial leverage and significant losses for the period?
a. Common stockholders are better off than they would have been if the firm was not as heavily leveraged.
b. It is impossible to determine the effect without knowing the operating leverage.
c. Common stockholders are worse off than they would have been if the firm was not as heavily leveraged.
d. The extent of financial leverage is not relevant to the well-being of common stockholders.
Common stockholders are worse off than they would have been if the firm was not as heavily leveraged.
All of the following are features of just-in-time (JIT) systems except
a. Simplification of production activities by eliminating non-value-added activities.
b. Reduction of inventories, ideally to zero.
c. Sharing of sales forecasts with vendors.
d. Immediate incoming inspection of materials to eliminate defective parts.
Immediate incoming inspection of materials to eliminate defective parts.
Which of the following types of bonds is most likely to maintain a constant market value?
a. Floating-rate.
b. Convertible.
c. Callable.
d. Zero-coupon.
Floating-rate.
Why would a firm generally choose to finance temporary assets with short-term debt?
Matching the maturities of assets and liabilities reduces risk.
A company with a combined federal and state tax rate of 30% has the following capital structure:
Weight Instrument Cost of capital
40% Bonds 10%
50% Common stock 10%
10% Preferred stock 20%
What is the weighted-average after-tax cost of capital for this company?
9.8%
DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination ofdebt and equity to finance the investment:
- Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-
flotation cost yield is 8.08%.
- Use $35,000,000 of funds generated from earnings.
- The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
Assume that the after-tax cost of debt is 7% and the cost of equity ïs 12%. Determine the weighted-average cost of capital.
10.50%
A growing company is assessing current working capital requirements. An average of 58 days is required to convert raw materials into finished goods and to sell
them. Then an average of 32 days is required to collect on receivables. If the average time the company takes to pay for its raw materials is 15 days after they are
received, then the total cash conversion cycle for this company would be
75 days.
As a consequence of finding a more dependable supplier, Fee Co. reduced its safety stock of raw materials by 60%. What is the effect of this safety stock reduction on Fee’s economic order quantity?
No effect.
ABC Co. had debt with a market value of $1 million and an after-tax cost of financing of 8%. ABC also had equity with a market value of $2 million and a cost of equity capital of 9%. ABC’s weighted-average cost of capital would be
8.7%
Which of the following is the most expensive form of additional capital?
a. New debt.
b. New preferred stock.
c. Retained earnings.
d. New common stock.
New common stock.
Which of the following statements is correct regarding the weighted-average cost of capital (WACC)?
a. A company with a high WACC is attractive to potential shareholders.
b. An increase in the WACC increases the value of the company.
c. One of a company’s objectives is to minimize the WACC.
d. WACC is always equal to the company’s borrowing rate.
One of a company’s objectives is to minimize the WACC.
If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using a 360-day year) of forgoing the
cash discount and making payment on the 40th day is
24.49%
Capital and operating leases differ in that the lessor
Finances the transaction through the leased asset only under a capital lease.
Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock?
a. A stock dividend increases a stockholder’s proportionate share of corporate ownership.
b. A stock dividend has the same legal and practical significance as a stock split.
c. A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders.
d. A stock dividend causes a decrease in the assets of the corporation.
A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders.
DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the
investment:
- Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-flotation cost yield is 8.08%.
- Use $3 5,000(000 of funds generated from earnings.
- The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
The before-tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is
8.08%
A company has an outstanding one-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in
its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan?
10%
Larson Corp. issued $20 million of long-term debt in the current year. What is a major advantage to Larson with the debt issuance?
The relatively low after-tax cost due to the interest deduction.
Which one of the following factors might cause a firm to increase the debt in its financial structure?
a. Increased economic uncertainty.
b. An increase in the price-earnings ratio.
c. An increase in the corporate income tax rate.
d. An increase in the federal funds rate.
An increase in the corporate income tax rate.
Assume that a firm has a 40% tax rate and the following capital structure:
Amount Cost before tax
Debt $10,000,000 6%
Preferred equity 5,000,000 6%
Common equity 25,000,000 10%
$40,000,000
What is the firm’s weighted-average cost of capital?
7.9%
When calculating the cost of capital, the cost assigned to retained earnings should be
Lower than the cost of external common equity.