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finance homework mcq with detail solutions




Question;(21.7) Aging Schedule Answer;b Diff: M;[i]. Short Construction offers;its customer?s credit terms of 2/10, net 30 days, while Fryman Construction;offers its customer?s credit terms of 2/10, net 45 days. The aging schedules for each of the two;companies? accounts receivable are reported below;Short Construction Fryman Construction;Age of Value;of Percentage of Value of Percentage of;Account;(Days);Account Total Value Account Total Value;0-10 $58,800 60% $ 73,500 50%;11-30;19,600 20 29,400 20;31-45;14,700 15 29,400 20;46-60;2,940 3 10,290 7;Over 60 1,960 2 4,410 3;Total Receivables;$98,000 $147,000;Which company has the greatest percentage of overdue;accounts and what is their percentage of overdue accounts?;a. Fryman, 50% overdue.;b. Short, 20% overdue.;c. Fryman, 30% overdue.;d. Fryman, 3% overdue.;e. Short, 40% overdue.;[ii]. Your;firm buys on credit terms of 2/10, net 45 days, and it always pays on Day;45. If you calculate that this policy;effectively costs your firm $159,621 each year, what is the firm?s average;accounts payable balance? (Hint: Use the nominal cost of trade credit and;carry its cost out to 6 decimal places.);a. $1,234,000;b. $ 75,000;c. $ 157,500;d. $ 625,000;e. $ 750,000;(21.8);EAR cost of trade credit Answer;e Diff: M;[iii]. Suppose;the credit terms offered to your firm by your suppliers are 2/10, net 30;days. Out of convenience, your firm is;not taking discounts, but is paying after 20 days, instead of waiting until Day;30. You point out that the nominal cost of not taking the discount and paying;on Day 30 is approximately 37 percent.;But since your firm is not taking discounts and is paying on Day 20;what is the effective annual cost of your firm?s current;practice, using a 365-day year?;a.;36.7%;b. 105.4%;c.;73.4%;d.;43.6%;e. 109.0%;[iv]. Hayes;Hypermarket 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. If Hayes chooses to pay on;time but not to take the discount, what is the average level of the company?s;accounts payable, and what is the effective;annual cost of its trade credit?;(Assume a 365-day year.);a. $208,333, 17.81%;b. $416,667, 17.54%;c. $416,667, 27.43%;d. $625,000, 17.54%;e. $625,000, 23.45%;[v]. A;firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it;pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.);a. 21.63%;b. 13.35%;c. 14.90%;d. 15.89%;e. 18.70%;[vi]. Phranklin;Pharms Inc. purchases merchandise from a company that gives sales terms of;2/15, net 40 days. Phranklin Pharms has;gross purchases of $819,388 per year.;What is the maximum amount of;costly trade credit Phranklin could get, assuming it abides by the supplier?s;credit terms? (Assume a 365-day year.);a. $88,000;b. $33,000;c. $55,000;d. $50,000;e. $44,000;[vii]. C+;Notes? business is booming, and it needs to raise more capital. The company purchases supplies from a single;supplier on terms of 1/10, net 20 days, and it currently takes the;discount. One way of getting the needed;funds would be to forgo the discount, and C+?s owner believes she could delay;payment to 40 days without adverse effects.;What is the effective annual rate;of stretching the accounts payable?;a. 10.00%;b. 11.11%;c. 11.75%;d. 12.29%;e. 13.01%;[viii]. Allen Brothers is interested;in increasing its free cash flow (which it hopes will result in a higher EVA;and stock price). The company?s goal is;to generate $180 million of free cash flow over the upcoming year. Allen?s CFO;has made the following projections for the upcoming year;?;EBIT;is projected to be $850 million.;?;Gross;capital expenditures are expected to total $360 million, and its depreciation;expense is expected to be $120 million.;Thus, its net capital expenditures are expected to total $240 million.;?;The;firm?s tax rate is 40 percent.;The company forecasts that there will be no change in;its cash and marketable securities, nor will there be any changes in notes;payable or accruals. Which of the;following will enable the company to achieve its goal of generating $180;million in free cash flow?;b. Accounts receivable increase $470 million;inventory increases $230 million, and accounts payable increase $790 million.;c. Accounts receivable increase $470 million;inventory increases $230 million, and accounts payable increase $610 million.;d. Accounts receivable decrease by $500;million, inventory increases by $480 million, and accounts payable decline by;$80 million.;e. Accounts receivable decrease by $400;million, inventory increases by $480 million, and accounts payable increase by;$80 million.;f. Accounts receivable increase by $500;million, inventory increases by $100 million, and accounts payable decline by;$480 million.;Tough;[ix]. Jordan Air Inc. has average inventory of;$1,000,000. Its estimated annual sales;are $10 million and the firm estimates its receivables conversion period to be;twice as long as its inventory conversion period. The firm pays its trade;credit on time, its terms are net 30 days.;The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average;inventory to $863,000. Assume a 365-day;year and that sales will not change. By;how much must the firm also reduce its accounts receivable to meet its goal of;a 10-day reduction in its cash conversion cycle?;a. $ 101,900;b. $1,000,000;c. $ 136,986;d. $ 333,520;e. $ 0;[x]. Dalrymple Grocers buys on;credit terms of 2/10, net 30 days, and it always pays on the 30th day. Dalrymple calculates that its annual costly;trade credit is $375,000. What is the;firm?s average accounts payable balance?;Assume a 365-day year.;a. $187,475;b. $374,951;c. $223,333;d. $562,426;e. $457,443;(21.8) Financial statements and;trade credit Answer: d Diff: T;[xi]. Quickbow Company currently uses maximum trade;credit by not taking discounts on its purchases. Quickbow is considering borrowing from its;bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of;this policy change on its net income. The standard industry credit terms;offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30;days. Its net purchases are $11,760 per;day, using a 365-day year. The interest;rate on the notes payable is 10 percent and the firm?s tax rate is 40;percent. If the firm implements the plan;what is the expected change in Quickbow?s net income?;a. -$23,520;b. -$31,440;c. +$23,520;d. +$38,448;e. +$69,888;Multiple Part;(The;following information applies to the next three problems.);Callison Airlines is deciding whether to pursue a restricted or relaxed;working capital investment policy.;Callison?s annual sales are expected to total $3.6 million, its fixed;assets turnover ratio equals 4.0, and its debt and common equity are each 50;percent of total assets. EBIT is;$150,000, the interest rate on the firm?s debt is 10 percent, and the firm?s;tax rate is 40 percent. If the company;follows a restricted policy, its total assets turnover will be 2.5.;Under a relaxed policy, its total assets turnover will be 2.2.;[xii]. If the firm adopts a;restricted policy, how much will it save in interest expense (relative to what;it would be if Callison were to adopt a relaxed policy)?;a. $;3,233;b. $;6,175;c. $;9,818;d. $;7,200;e. $10,136;[xiii]. What is the difference in the;projected ROEs between the restricted and relaxed policies?;a. 2.24%;b. 1.50%;c. 1.00%;d. 0.50%;e. 0.33%;[xiv]. Assume now the company;expects that if it adopts a restricted policy, its sales will fall by 15;percent, EBIT will fall by 10 percent, but its total assets turnover, debt;ratio, interest rate, and tax rate will remain the same. In this situation, what is the difference in;the projected ROEs between the restricted and relaxed policies?;a. 2.24%;b. 1.50%;c. 1.00%;d. 0.50%;e. 0.33%;Financial Calculator Section;Multiple;Choice: Problems;Medium;[xv]. Wicker;Corporation is determining whether to support $100,000 of its permanent working;capital with a bank note or a short-term bond.;The firm?s bank offers a two-year note for which the firm will receive;$100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at;market rates. Alternatively, Wicker can;sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000 par;value at a price of $973.97. How many;percentage points lower is the interest rate on the less expensive debt instrument?;a. 0.0%;b. 1.2%;c. 1.0%;d. 1.8%;e. 0.6%;Tough;[xvi]. Leiner;Corp. is a retailer that finances its purchases with trade credit under the;following terms: 1/10, net 30 days. The;company plans to take advantage of the free trade credit that is offered. After all the free trade credit is used, the;company can either finance the clothing purchases with a bank loan that has an;effective rate of 10.1349 percent (on a 365-day year), or the firm can continue;to use trade credit.;The company has an understanding;with its suppliers that within moderation, it is all right to ?stretch out? its;payments beyond 30 days without facing any additional financing costs. Therefore, the longer it takes the company to;pay its suppliers, the lower the cost of trade credit. How many days would the firm wait to pay its;suppliers in order for the cost of the trade credit to equal the cost of the;bank loan?;a. 30;days;b. 36;days;c. 40;days;d. 46;days;e. 48;days


Paper#48803 | Written in 18-Jul-2015

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