The cash conversion cycle is the length of time from a the payment of accrued wages to manufacture a product until the sale of that product b the payment of accrued wages to manufacture a product until the collection of accounts c the payment for the purchase of raw materials to manufacture a product until the sale of that product d the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product QUESTION 2 1 A firm has determined that it can minimize its weighted average cost of capital (WACC) with 40 debt and 60 equity in its capital raise If the firm's cost of debt is 9 before taxes, the cost of equity is estimated to be 12 before taxes, and the tax rate is 40 , what is the firm's WACC a 4 32 b 6 48 c 9 36 d 10 8 QUESTION 3 In weighted average cost of capital, a company can affect its capital cost through a policy of capital structure b policy of dividends c policy of investments d all of the above QUESTION 4 Jumpstick Company writes checks averaging $15,000 a day and it takes 5 days for these checks to clear The firm also receives checks in the amount of $17,000 a day, but the firm loses three days while its receipts are being deposited and cleared What is the firm's net float in dollars a $126,000 b $75,000 c $32,000 d $24,000 e $16,000 QUESTION 5 A lockbox plan is a A method of safe keeping of marketable securities b Used to identify inventory safety stock c A system of slowing down the collection of checks wriiten by a firm d Not described by any of the statements above e All of the above QUESTION 6 Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly True False QUESTION 7 Which of the following statements is most correct a Net working captital may be defined as current assets minus current liabilities Any increase in the current ratio will automatically lead to an increase in net working capital b Although short term interest rates have historically averaged less than long term rates, the heavy use of short term debt is considered to be an aggressive strategy because of the inherent risks of using short term financing c If a company follows a policy of matching securities, this means its use of common stock with its use of long term debt as opposed to short term debt d Each of the above statements is true e Each of the above statements is false QUESTION 8 The president of Real Time Inc has asked you to evaluate the proposed acquisition of a new computer The computer's price is $40,000, and it falls into the MACRS 3 year class Purchase of the computer would require an increase in net working capital of $2,000 The computer would increase the firm's before tax revenues by $20,000 per year but wuld also increase operating costs by $5,000 per year The computer is expected to be used for 3 years and then be sold for $25,000 The firm's marginal tax rate is 40 , and the project's required rate of return is 14 What is the supplemental operating cash flow in Year 2 a $9,000 b $10,240 c $11,687 d $13,453 e $16,200 QUESTION 9 Find the IRR for the following Capital Budgeting project Year 0 $ 1000 Year 1 $500 Year 2 $400 Year 3 $300 Year 4 $200 Year 5 $100 a 8 08 b 10 0 c 15 35 d 20 27 QUESTION 10 The after tax weighted average cost of capital is determined by a Multiplying the weighted average after tax cost of debt by the weighted average cost of equity b Adding the weighted average before tax cost of debt to the weighted average cost of equity c Adding the weighted average after tax cost of debt to the weighted average cost of equity d Dividing the weighted average before tax cost of debt to the weighted average cost of equity QUESTION 11 Interest rate is 12 and tax savings (1 0 40) then after tax component cost of debt will be 7 2 7 2 times 17 14 times US $17 14 QUESTION 12 Inventory financing can take the form of a a Blanket lien b Trust receipt c Warehouse receipt d All of the above e Answers a and b above QUESTION 13 Accruals represent a source of free financing in the sense that no explicit interest is paid on these funds True False 1 points QUESTION 14 The is the average length of time required to convert materials into finished goods and then sell those goods a payables deferral period b receivables collection period c cash conversion period d inventory conversion period QUESTION 15 Find the NPV for the following Capital Budgeting project ear 0 $ 1000 Year 1 $500 Year 2 $400 Year 3 $300 Year 4 $200 Year 5 $100 Cost of capital 10 a 239 21 b 239 21 c 2,392 1 d 2,392 1 QUESTION 16 Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables However, they can provide erroneous signals to credit managers when a Customer's payments patterns are changing b Sales fluctuate seasonally c Some customers take the discount and others do not d Sales are relatively constant, either seasonally or cyclically e None of the above QUESTION 17 Internal equity avoids the flotation costs associated with raising external equity Therefore, by utilizing internal equity rather than external equity, the initial cost of the project is decreased Decreasing the initial cost increases the NPV of the project True False QUESTION 18 EOQ stands for a eliminated operating quintile b efficiency operating quality c economic ordering quantity d evident operating quotient QUESTION 19 The amount of safety stocks held by a firm generally a increases with greater uncertainty of demand forecasts b increases with higher costs (in terms of lost sales and lost goodwill) of stockouts c increases with a greater chance that delays will occur in receiving shipments d decreases as the cost of carrying additional inventory increases e All of the above QUESTION 20 is the management of short term assets and liabilities a Trend analysis b Ration analysis c Capital budgeting d Working capital management QUESTION 21 1 P0 $30 expected D $3 00 Rs a 1 b 3 c 10 d cannot determine the cost of preferred stock QUESTION 22 $112,360 is the face value of a note with a discount interest basis at a simple annual rate of 11 What will the loan procceds be to the company at loan disbursement a $111,000 b $100,000 c $89,000 d $108,840 e 124,720 QUESTION 23 A company has a growth rate of 4 8 percent and is equally as risky as the market The stock is currently selling for $17 a share The overall stock market has a 10 6 percent rate of return and a risk premium of 8 7 percent What is the expected rate of return on this stock a 8 7 b 9 2 c 10 6 d 11 3 QUESTION 24 A revolving credit agreement is a formal line of credit usually used by large firms The firm will pay a fee on the unused balance of the committed funds to compensate the lender for the commitment to extend those funds True False QUESTION 25 What is the inventory conversion period for a firm that has inventory of $1 5M, a tax rate of 35 daily cost of goods sold of $300,000, and a profit margin of 12 percent a 3 25 days b 0 60 days c 5 00 days d 6 75 days QUESTION 26 Magic Pan Restaurant Inc 's average interest rate for all of its Debt outstanding is 7 86 It's marginal income tax rate is 35 What is the after tax cost of its Debt a 2 75 b 5 1 c 10 6 d 12 1 QUESTION 27 Mid State Electric Company must clean up the water released from its generating plant The company's required rate of return is 10 for average projects, and that rate is normally adjusted up or down by 2 for high risk and low risk projects Clean up Plan A, which is of average risk, has an initial cost of $1,000 at time 0, and its operating cost will be $100 per year for its 10 year life Plan B, which is a high risk project, has an initial cost of $300, and its annual operating cost over Years 1 to 10 will be $200 What is the proper PV of costs for the better project a $1,430 04 b $1,525 88 c $1,614 46 d $1,642 02 e $1,728 19 QUESTION 28 1 P0 $30 current D $2 00 g 5 F 10 Re a 7 8 b 12 c 12 4 d 12 8 QUESTION 29 Which of the following will NOT help a firm speed up the timing of when it can obtain the use of funds from checks written to it a Lockbox arrangement b Concentration banking c Zero balance accounts d All of the above e Only answers a and b QUESTION 30 Long term loan agreements always contain provisions, or covenants, which constrain he firm's future actions Short term credit agreements are just as restrictive in order to protect the interests of the lender True False QUESTION 31 Which of the following might be attributed to efficient inventory management High inventory turnover ratio Low incidence of production schedule disruptions High total asset turnover All of the above Only answers a and c above QUESTION 32 Which of the following statements is correct a In a factoring arrangement, the factor always performs three functions (1) credit checking, (2) lending, and (3) receivables collection b In a factoring arrangement, the factor would not perform the credit checking and risk taking function without performing the lending function, because the former are required before the factor can lend to the seller c In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement d None of the above QUESTION 33 In the text, the red line method refers to of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live wthin those areas e None of the above QUESTION 34 Which of the following would cause average inventory holdings to decrease, other things constant a Fixed order costs double b The purchase price of inventory items decreases by 50 c The carrying cost of an item decreases (as a percent of purchase price) d The sales forecast is revised downward by 10 percent e None of the above (all would cause average inventory to increase) QUESTION 35 Which of the following statements is false a In addition to sales price, product quality, and advertising, credit policy is a major controllable variable which can affect product demand b Sharp seasonal swings in sales and fast growth are two reasons why a firm's aging schedule and DSO may show high variability c Changes in a firm's collection policy can affect sales and working capital but will not affect additional funds needed d Cash discounts can be used to influence a firm's sales volume and ts DSO QUESTION 36 Stanton Inc is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5 year operating life for $10,000 before taxes Stanton's marginal tax rate is 40 , and it uses a 9 required rate of return to evaluate projects of this type If the machine's cost is $40,000, what s the project's NPV a $1,014 b $2,292 c $7,550 d $817 e $5,040

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The cash conversion cycle is the length of time from a.the payment of accrued wages to manufacture a product until the sale of that product

The cash conversion cycle is the length of time from

a.the payment of accrued wages to manufacture a product until the sale of that product
b.the payment of accrued wages to manufacture a product until the collection of accounts
c.the payment for the purchase of raw materials to manufacture a product until the sale of that product
d.the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product

QUESTION 2

1. A firm has determined that it can minimize its weighted average cost of capital (WACC) with 40% debt and 60% equity in its capital raise. If the firm's cost of debt is 9% before taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm's WACC?

a.4.32%
b.6.48%
c.9.36%
d.10.8%

QUESTION 3

In weighted average cost of capital, a company can affect its capital cost through

a.policy of capital structure
b.policy of dividends
c.policy of investments
d.all of the above

QUESTION 4

Jumpstick Company writes checks averaging $15,000 a day. and it takes 5 days for these checks to clear. The firm also receives checks in the amount of $17,000 a day, but the firm loses three days while its receipts are being deposited and cleared. What is the firm's net float in dollars?

a.$126,000
b.$75,000
c.$32,000
d.$24,000
e.$16,000

QUESTION 5

A lockbox plan is

a.A method of safe-keeping of marketable securities
b.Used to identify inventory safety stock
c.A system of slowing down the collection of checks wriiten by a firm
d.Not described by any of the statements above
e.All of the above

QUESTION 6

Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly

True
False

QUESTION 7

Which of the following statements is most correct?

a.Net working captital may be defined as current assets minus current liabilities. Any increase in the current ratio will automatically lead to an increase in net working capital.
b.Although short-term interest rates have historically averaged less than long term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short-term financing.
c.If a company follows a policy of matching securities, this means its use of common stock with its use of long-term debt as opposed to short-term debt.
d.Each of the above statements is true
e.Each of the above statements is false

QUESTION 8

The president of Real Time Inc. has asked you to evaluate the proposed acquisition of a new computer. The computer's price is $40,000, and it falls into the MACRS 3-year class. Purchase of the computer would require an increase in net working capital of $2,000. The computer would increase the firm's before-tax revenues by $20,000 per year but wuld also increase operating costs by $5,000 per year. The computer is expected to be used for 3 years and then be sold for $25,000. The firm's marginal tax rate is 40%, and the project's required rate of return is 14%. What is the supplemental operating cash flow in Year 2?

a.$9,000
b.$10,240
c.$11,687
d.$13,453
e.$16,200

QUESTION 9

Find the IRR for the following Capital Budgeting project.
Year 0 $-1000
Year 1 $500
Year 2 $400
Year 3 $300
Year 4 $200
Year 5 $100

a.8.08%
b.10.0%
c.15.35%
d.20.27%

QUESTION 10

The after-tax weighted average cost of capital is determined by:

a.Multiplying the weighted average after tax cost of debt by the weighted average cost of equity
b.Adding the weighted average before tax cost of debt to the weighted average cost of equity
c.Adding the weighted average after tax cost of debt to the weighted average cost of equity
d.Dividing the weighted average before tax cost of debt to the weighted average cost of equity

QUESTION 11

Interest rate is 12% and tax savings (1-0.40) then after-tax component cost of debt will be

7.2%
7.2 times
17.14 times
US $17.14

QUESTION 12

Inventory financing can take the form of a

a.Blanket lien
b.Trust receipt
c.Warehouse receipt
d.All of the above
e.Answers a and b above

QUESTION 13

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds

True
False

1 points

QUESTION 14

The ____________________is the average length of time required to convert materials into finished goods and then sell those goods.

a.payables deferral period
b.receivables collection period
c.cash conversion period
d.inventory conversion period

QUESTION 15

Find the NPV for the following Capital Budgeting project.
ear 0 $-1000
Year 1 $500
Year 2 $400
Year 3 $300
Year 4 $200
Year 5 $100
Cost of capital : 10

a.-239.21
b.239.21
c.-2,392.1
d.2,392.1

QUESTION 16

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables. However, they can provide erroneous signals to credit managers when

a.Customer's payments patterns are changing
b.Sales fluctuate seasonally
c.Some customers take the discount and others do not
d.Sales are relatively constant, either seasonally or cyclically
e.None of the above

QUESTION 17

Internal equity avoids the flotation costs associated with raising external equity. Therefore, by utilizing internal equity rather than external equity, the initial cost of the project is decreased. Decreasing the initial cost increases the NPV of the project.

True
False

QUESTION 18

EOQ stands for

a.eliminated operating quintile
b.efficiency operating quality
c.economic ordering quantity
d.evident operating quotient

QUESTION 19

The amount of safety stocks held by a firm generally

a.increases with greater uncertainty of demand forecasts
b.increases with higher costs (in terms of lost sales and lost goodwill) of stockouts
c.increases with a greater chance that delays will occur in receiving shipments
d.decreases as the cost of carrying additional inventory increases
e.All of the above

QUESTION 20

___________________ is the management of short-term assets and liabilities

a.Trend analysis
b.Ration analysis
c.Capital budgeting
d.Working capital management

QUESTION 21

1. P0 = $30; expected D = $3.00; Rs = ?

a.1%
b.3%
c.10%
d. cannot determine the cost of preferred stock

QUESTION 22

$112,360 is the face value of a note with a discount interest basis at a simple annual rate of 11%. What will the loan procceds be to the company at loan disbursement?

a.$111,000
b.$100,000
c.$89,000
d.$108,840
e.124,720

QUESTION 23

A company has a growth rate of 4.8 percent and is equally as risky as the market. The stock is currently selling for $17 a share. The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock?

a.8.7%
b.9.2%
c.10.6%
d.11.3%

QUESTION 24

A revolving credit agreement is a formal line of credit usually used by large firms. The firm will pay a fee on the unused balance of the committed funds to compensate the lender for the commitment to extend those funds

True
False

QUESTION 25

What is the inventory conversion period for a firm that has inventory of $1.5M, a tax rate of 35%. daily cost of goods sold of $300,000, and a profit margin of 12 percent?

a.3.25 days
b.0.60 days
c.5.00 days
d.6.75 days

QUESTION 26

Magic Pan Restaurant Inc.'s average interest rate for all of its Debt outstanding is 7.86%. It's marginal income tax rate is 35%. What is the after-tax cost of its Debt?

a.2.75%
b.5.1%
c.10.6%
d.12.1%

QUESTION 27

Mid-State Electric Company must clean up the water released from its generating plant. The company's required rate of return is 10% for average projects, and that rate is normally adjusted up or down by 2% for high-risk and low-risk projects. Clean up Plan A, which is of average risk, has an initial cost of -$1,000 at time 0, and its operating cost will be -$100 per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of -$300, and its annual operating cost over Years 1 to 10 will be -$200. What is the proper PV of costs for the better project?

a.$1,430.04
b.$1,525.88
c.$1,614.46
d.$1,642.02

e.-$1,728.19

QUESTION 28

1. P0 = $30; current D = $2.00; g = 5%; F = 10%; Re = ?

a.7.8%
b.12%
c.12.4%
d.12.8%

QUESTION 29

Which of the following will NOT help a firm speed up the timing of when it can obtain the use of funds from checks written to it?

a.Lockbox arrangement
b.Concentration banking
c.Zero-balance accounts
d.All of the above
e.Only answers a and b

QUESTION 30

Long-term loan agreements always contain provisions, or covenants, which constrain he firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

True
False

QUESTION 31

Which of the following might be attributed to efficient inventory management?

High inventory turnover ratio
Low incidence of production schedule disruptions
High total asset turnover
All of the above
Only answers a and c above

QUESTION 32

Which of the following statements is correct?

a.In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection
b.In a factoring arrangement, the factor would not perform the credit checking and risk taking function without performing the lending function, because the former are required before the factor can lend to the seller
c.In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement
d.None of the above

QUESTION 33

In the text, the red-line method refers to
of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live wthin those areas
e.None of the above

QUESTION 34

Which of the following would cause average inventory holdings to decrease, other things constant?

a.Fixed order costs double
b.The purchase price of inventory items decreases by 50%
c.The carrying cost of an item decreases (as a percent of purchase price)
d.The sales forecast is revised downward by 10 percent
e.None of the above (all would cause average inventory to increase)

QUESTION 35

Which of the following statements is false?

a.In addition to sales price, product quality, and advertising, credit policy is a major controllable variable which can affect product demand
b.Sharp seasonal swings in sales and fast growth are two reasons why a firm's aging schedule and DSO may show high variability
c.Changes in a firm's collection policy can affect sales and working capital but will not affect additional funds needed
d.Cash discounts can be used to influence a firm's sales volume and ts DSO

QUESTION 36

Stanton Inc. is considering the purchase of a new machine which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it expects to sell the machine at the end of its 5-year operating life for $10,000 before taxes. Stanton's marginal tax rate is 40%, and it uses a 9% required rate of return to evaluate projects of this type. If the machine's cost is $40,000, what s the project's NPV?