Mod 44 Wrong Answers Flashcards
The main reason to retain working capital is to…
Meet the firm’s financial obligations
Determining the appropriate level of working capital for a firm requires…
Offsetting the benefit of current assets and current liabilities
Against the probability of technical insolvency
The terms of sale are 3/10 net 30. 1 out of 3 customers get the discount and the rest pay on day 30. Calculate the days sales outstanding?
Average days sales outstanding = (1/3) (10 days) + (2/3) (30 days)
A wire transfer fee cost $10 and collections would be accelerated by 3 days and interest paid to the bank per day is 7.2% (7.2%/365 = 0.02%). At what amount of dollars transferred would it be economically feasible to use wire transfer instead of DTC?
$10/(3 x .02%)
A bank will charge $20,000 annually for the lockbox service, which will save the firm approximately $10,000 in processing costs. The lockbox system will reduce the float for cash receipts by 4 days. Assuming the average daily receipts are equal to $200,000 and short term interest costs are 6%. Calculate the benefit or loss from adopting the lockbox system.
$10,000 = ($20,000 - $10,000) = increased cost of calculating cash rec.
$48,000 = ($200,000 x 4 x .06) = interest savings
$48,000 - $10,000 = $38,000 benefit
Alternative marketable security not suitable for short term investment.
Convertible bonds
Between money market accounts, treasury bills, treasury notes and commercial paper, which investment pays the highest return?
Commercial paper
Why does commercial paper have the highest return?
It is issued by the corporation
When switching from a traditional inventory ordering system to a just in time ordering system, what happens to cost per purchase order?
2) inventory unit carrying costs?
Cost per purchase order decreases
2) inventory unit carrying costs increase
Calculating n of reorder point includes consideration of…3
1 average daily usage
2 average delivery time
3 stock out costs
A traditional system that has a lot sized based on immediate need compared to a just in time system that has a lot size based on formulas is…
Not a correct comparison
For a just in time system, lot size is based on…
Immediate need
Traditional system lot size is based on…
Formulas
Inventory turnover equation
Inventory turnover = cost of goods sold/average inventory
When changing from a traditional manufacturing philosophy to a just in time philosophy, what are the expected effects of change on Bell’s inventory turnover and inventory as a percentage of total assets?
Inventory turnover will increase
Inventory percentage will decrease
Safety stock is a…
Buffer of excess inventory held to guard against stock outs
Safety stock is usually a multiple of demand and has…
No effect on a company’s EOQ
Economic order quantity formula assumes that…
Periodic demand for a good is known
The following information pertains to material X that is used by sage company:
Annual usage in units. 40,000
Working days per year. 200
Safety stock in units. 850
Normal lead time in working days. 40
What is the order point?
Daily demand x lead time in days + safety stock
(40,000/200). X. 40. 850
An example of inventory carrying cost is…
Obsolescence
Just in Time inventory management systems relies…
Heavily on good quality materials
Initiating seasonal dating will…
Not reduce credit costs
It will increase credit costs
Current bad debt experience is…
Not relevant to a decision to change current credit policy
Credit sales = $5 million
Relaxing credit standards will increase credit sales by $800,000
Average collection period = 80 days
Variable costs = 70% of sales
Opportunity cost = 30%
360 day year
What is company’s benefit from change in credit terms?
Benefit from increase in sales = $800,000 x 30%
Interest cost = (($800,000 x 70%)/360) x 80 x 30%
4 types of borrowing that are unsecured credit
1 revolving credit
2 bankers acceptances
3 line of credit
4 commercial paper
A bank requires a compensating balance of 25% on a $100,000 loan. The stated interest rate on the loan is 8%. What is the effective cost of the loan?
($100,000 x 8%)/(75% x $100,000)
Financing permanent inventory build up with long term debt is an example of…
Conservative working capital policy
Commercial paper is normally issued with a…
Short maturity period, usually 2 to 9 months
What is the effective interest rate of a stated 8% note of $100,000
($100,000 x 8%)/(100,000-8,000)
A company with a revolving line of credit of $400,000
Interest rate = 7%
Commitment fee = 0.5%
Average loan balance = $100,000
What is the annual cost of the financing arrangement?
7% X $100,000 + (($400,000 - $100,000) X 0.5%)
Prime rate is the rate…
Charged on loans to borrowers with the highest credit rating
What bond financing alternative is detrimental to the investor?
Call provision
Eurobonds are always sold in…
Some country other than the one whose currency the bond is denominated
If an investor is concerned about interest rate risk they should invest in…
Floating rate bonds
The company issues $15 million of 20 year bonds at 102 with a coupon rate of 7% and floatation costs of 3%. The before tax cost of DQZs planned debt financing net of floatation costs is…
7%/(102% - 3%)
Which of the following bond provisions is generally considered detrimental to the investor?
Callable
Which of the following is not an advantage of leasing as a form of financing?
The dollar cost
Cumulative preferred stock does not have…
Not have voting rights
Alternative 1:
Long term debt, 5% interest. $2 million
Common equity. $4 million
Cost of common equity, 9%
Marginal tax rate, 20%
Alternative 2:
Long Term Debt, 6% interest. 3 million
Common equity. 3 million
Cost of common equity, 11%
Marginal tax rate, 20%
Which alternative has the lowest weighted average cost of capital and how much is the differential?
Alternative 1: (5% bond interest x (100% - 20% tax rate) = 4%
Alternative 2: (6% bond interest x (100% - 20% tax rate) = 4.8%
A1 = ((4% x $2 million)/$ 6 million) + ((9% X $4 million)/$6 million) - A2 = ((4.8% x $3 million)/$6 million) + ((11% X $3 million)/$6 million)
The CAPM is used to calculate the estimated cost of common equity. Which of the following would reduce the firm’s estimated cost of common equity?
Reduction in risk free rate
In general it is more expensive for a company to finance with equity than with debt because…
Investors are exposed to greater risk with equity capital
CAPM is based on the actual market price is…
Not true about CAPM
When calculating the net cost of debt…
Taxes should be taken into consideration
Debt = $20 million, price = 102, flotation costs 3%, coupon rate = 8%
Equity = $30 million, cost of equity = 13%
Tax rate. = 40%, after tax debt = 6%
What is the weighted average cost of capital? 3 steps
(102% - 3%) x $20 million = $19,800,000
Total funding = ($19,800,000 + $30 million) = $49,800,000
($19.8 million/$49.8 million) x 6% + ($30 million/49.8 million) x 13%
According to the CAPM model, relevant risk of a security is its…
Systematic risk
When interest expense from debt is higher…
Tax expense is lower
