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Yaegar BEC > Mod 44 Wrong Answers > Flashcards

Mod 44 Wrong Answers Flashcards

1
Q

The main reason to retain working capital is to…

A

Meet the firm’s financial obligations

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2
Q

Determining the appropriate level of working capital for a firm requires…

A

Offsetting the benefit of current assets and current liabilities
Against the probability of technical insolvency

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3
Q

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?

A

Average days sales outstanding = (1/3) (10 days) + (2/3) (30 days)

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4
Q

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?

A

$10/(3 x .02%)

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5
Q

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.

A

$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

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6
Q

Alternative marketable security not suitable for short term investment.

A

Convertible bonds

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7
Q

Between money market accounts, treasury bills, treasury notes and commercial paper, which investment pays the highest return?

A

Commercial paper

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8
Q

Why does commercial paper have the highest return?

A

It is issued by the corporation

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9
Q

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?

A

Cost per purchase order decreases

2) inventory unit carrying costs increase

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10
Q

Calculating n of reorder point includes consideration of…3

A

1 average daily usage

2 average delivery time

3 stock out costs

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11
Q

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…

A

Not a correct comparison

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12
Q

For a just in time system, lot size is based on…

A

Immediate need

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13
Q

Traditional system lot size is based on…

A

Formulas

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14
Q

Inventory turnover equation

A

Inventory turnover = cost of goods sold/average inventory

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15
Q

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?

A

Inventory turnover will increase

Inventory percentage will decrease

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16
Q

Safety stock is a…

A

Buffer of excess inventory held to guard against stock outs

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17
Q

Safety stock is usually a multiple of demand and has…

A

No effect on a company’s EOQ

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18
Q

Economic order quantity formula assumes that…

A

Periodic demand for a good is known

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19
Q

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?

A

Daily demand x lead time in days + safety stock

(40,000/200). X. 40. 850

20
Q

An example of inventory carrying cost is…

A

Obsolescence

21
Q

Just in Time inventory management systems relies…

A

Heavily on good quality materials

22
Q

Initiating seasonal dating will…

A

Not reduce credit costs

It will increase credit costs

23
Q

Current bad debt experience is…

A

Not relevant to a decision to change current credit policy

24
Q

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?

A

Benefit from increase in sales = $800,000 x 30%

Interest cost = (($800,000 x 70%)/360) x 80 x 30%

25
Q

4 types of borrowing that are unsecured credit

A

1 revolving credit
2 bankers acceptances
3 line of credit
4 commercial paper

26
Q

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?

A

($100,000 x 8%)/(75% x $100,000)

27
Q

Financing permanent inventory build up with long term debt is an example of…

A

Conservative working capital policy

28
Q

Commercial paper is normally issued with a…

A

Short maturity period, usually 2 to 9 months

29
Q

What is the effective interest rate of a stated 8% note of $100,000

A

($100,000 x 8%)/(100,000-8,000)

30
Q

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?

A

7% X $100,000 + (($400,000 - $100,000) X 0.5%)

31
Q

Prime rate is the rate…

A

Charged on loans to borrowers with the highest credit rating

32
Q

What bond financing alternative is detrimental to the investor?

A

Call provision

33
Q

Eurobonds are always sold in…

A

Some country other than the one whose currency the bond is denominated

34
Q

If an investor is concerned about interest rate risk they should invest in…

A

Floating rate bonds

35
Q

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…

A

7%/(102% - 3%)

36
Q

Which of the following bond provisions is generally considered detrimental to the investor?

A

Callable

37
Q

Which of the following is not an advantage of leasing as a form of financing?

A

The dollar cost

38
Q

Cumulative preferred stock does not have…

A

Not have voting rights

39
Q

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?

A

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)
40
Q

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?

A

Reduction in risk free rate

41
Q

In general it is more expensive for a company to finance with equity than with debt because…

A

Investors are exposed to greater risk with equity capital

42
Q

CAPM is based on the actual market price is…

A

Not true about CAPM

43
Q

When calculating the net cost of debt…

A

Taxes should be taken into consideration

44
Q

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

A

(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%

45
Q

According to the CAPM model, relevant risk of a security is its…

A

Systematic risk

46
Q

When interest expense from debt is higher…

A

Tax expense is lower

Yaegar BEC (30 decks)

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