Which of the following statements correctly describe the reasons why firms hold cash even though cash doesn't earn interests? _____

	Firms hold transaction cash for routine payments and collections.
	Firms reserve precautionary cash for random and unforeseen fluctuations in cash flows.
	Firms hold cash to take advantage of bargains, discounts, etc.
	All of the statements above are correct.

Based on the residual dividend policy, if company has better operating performance with a higher net income, it has more cash which can be distributed to common shareholders given the same capital budget. _____

True

False

Which of the following statements regarding capital budgeting analysis is not most correct? _____

	NPV assumes reinvest at the opportunity cost of capital.
	IRR assumes reinvest at IRR.
	Reinvest at opportunity cost, r, is more realistic, so NPV method is best.
	None of the above statements is correct.

The credit term 2/20, net 50 means that the buyers can take up 30 (50-20) days to pay. But the firm allows buyers to take 2% discount if they pay in 20 days. Otherwise, they must pay the full amount within 30 days. _____

True

False

A firm purchases $4,562,500 in goods over a 1-year period from its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50 days. Davis finally chooses to pay on time (pay in the 50th day) but not to take the discount. We assume 365 days per year. what is the average level of the company's total trade credit? ______

	$187,500
	$437,500
	$625,000
	$4,562,500

From the above what is the nominal annual cost of the firm's costly trade credit? ______

17.6%

21.3%

23.5%

25.2%

what is the effective annual cost of the firm's costly trade credit? ______

	17.6%
	21.3%
	23.5%
	25.2%