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Davenport FINC620 quiz 6

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Question;Question 1Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?$24,057$26,730$29,700$33,000$36,3002 points Question 2Soenen Inc. had the following data for 2008 (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold. Soenen finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year. If these changes had been made, by how much would the firm's pre-tax income have increased?OriginalBenchmarkDataRelated CCCCCCSales$100,000Cost of goods sold$ 80,000Inventory (ICP)$ 20,000 91.2538.00Receivables (DSO)$ 16,000 58.4020.00Payables (PDP)$ 5,000 22.8130.00126.8428.001,9012,0922,3012,5312,7842 points Question 3Which of the following statements is CORRECT?Accruals are an expensive but commonly used way to finance working capital.A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.If a firm has a relatively aggressive current asset financing policy vis-?-vis other firms in its industry, then its current ratio will probably be relatively high.2 points Question 4Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income?$32,964$34,699$36,526$38,448$40,3702 points Question 5Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?$335,616$352,397$370,017$388,518$407,9442 points Question 6Which of the following statements is CORRECT?Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.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 associated with using short-term financing.If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.2 points Question 7Which of the following isNOTdirectly reflected in the cash budget of a firm that is in the zero tax bracket?Payments lags.Depreciation.Cumulative cash.Repurchases of common stock.Payment for plant construction.2 points Question 8Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?$123,630$130,137$136,986$143,836$151,0272 points Question 9Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?63 days67 days70 days74 days78 days2 points Question 10A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is theeffective annual percentage costof its non-free trade credit? (Use a 365-day year.)14.34%15.10%15.89%16.69%17.52%2 points Question 11Which of the following statements is CORRECT?Trade credit is provided only to relatively large, strong firms.Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.Commercial paper is typically offered at a long-term maturity of at least five years.2 points Question 12Multi-Part 16-1:Zorn Corporation is deciding whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. 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.Refer to Multi-Part 16-1. Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?2.24%2.46%2.70%2.98%3.27%2 points Question 13A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is thenominal annual percentage costof its non-free trade credit, based on a 365-day year?25.09%27.59%30.35%33.39%36.73%2 points Question 14Which of the following isNOTa situation that might lead a firm to increase its holdings of short-term marketable securities?The firm must make a known future payment, such as paying for a new plant that is under construction.The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.The firm just won a product liability suit one of its customers had brought against it.2 points Question 15Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is theeffective annual percentage costof its non-free trade credit? (Assume a 365-day year.)20.11%21.17%22.28%23.45%24.63%

 

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