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Question;Gaston Piston Corp. has annual sales of;$50,735,000 and maintains an average inventory level of $15,012,000. The;average accounts receivable balance outstanding is $10,008,000. The company;makes all purchases on credit and has always paid on the 30th day. The company;is now going to take full advantage of trade credit and pay its suppliers on;the 40th day. If sales can be maintained at existing levels but inventory can;be lowered by $1,946,000 and accounts receivable lowered by $1,946,000, what;will be the net change in the cash conversion cycle? (Assume there are 365 days;in the;year.);a. -14.0 days;b. -18.8 days;c. -28.0 days;d. -25.6 days;e. -38.0 days;Jarrett Enterprises is considering;whether to pursue a restricted or relaxed current asset;investment policy. The firm's annual sales are $400,000, its fixed assets are;$100,000;debt and equity are each 50 percent of total assets. EBIT is $36,000, the;interest rate on;the firm's debt is 10 percent, and the firm's tax rate is 40 percent. With a;restricted;policy, current assets will be 15 percent of sales. Under a relaxed policy;current assets;will be 25 percent of sales. What is the difference in the projected ROEs;between the;restricted and relaxed policies?;a. 0.0%;b. 6.2%;c. 5.4%;d. 1.6%;e. 3.8%;Chadmark Corporation's budgeted monthly;sales are $3,000. Forty percent of its customers pay in the first month and;take the 2 percent discount. The remaining 60 percent pay in the month;following the sale and don't receive a discount. Chadmark's;bad debts are very small and are excluded from this analysis. Purchases for;next month's sales are constant each month at $1,500. Other payments for wages;rent, and taxes are constant at $700 per month. Construct a single month's cash;budget with the information given. What is the average cash gain or (loss) during;a typical month for Chadmark Corporation?;a. $2,600;b. $ 800;c. $ 776;d. $ 740;e. $ 728;Cross Collectibles currently fills mail;orders from all over the U.S. and receipts come in;to headquarters in Little Rock, Arkansas. The firm's average accounts;receivable (A/R) is;$2.5 million and is financed by a bank loan with 11 percent annual interest.;Cross is;considering a regional lockbox system to speed up collections which it believes;will;reduce A/R by 20 percent. The annual cost of the system is $15,000. What is;the;estimated net annual savings to the firm from implementing the lockbox system?;a. $500,000;b. $ 30,000;c. $ 60,000;d. $ 55,000;e. $ 40,000;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;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%;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%;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%;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;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;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;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;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;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%;A firm's credit policy consists of;which of the following items?;a. Credit period, cash discounts, credit standards, receivables;monitoring.;b. Credit period, cash discounts, credit standards, collection policy.;c. Credit period, cash discounts, receivables monitoring, collection policy.;d. Cash discounts, credit standards, receivables monitoring, collection policy.;e. Credit period, receivables monitoring, credit standards, collection policy.;Which of the following is not correct?;a. Collection policy is how a firm goes about collecting past-due;accounts.;b. A more aggressive collection policy will reduce bad debt expenses, but may;also decrease sales.;c. Collection policy usually has little impact on sales since collecting;past-due accounts;occurs only after the customer has already purchased.;d. Typically a firm will turn over an account to a collection agency only after;it has tried;several times on its own to collect the account.;e. A lax collection policy will frequently lead to an increase in accounts;receivable.;Which of the following statements is;most correct?;a. If credit sales as a percentage of a firm's total sales increases, and the;volume of credit;sales also increases, then the firm's accounts receivable will automatically;increase.;b. It is possible for a firm to overstate profits by offering very lenient;credit terms which encourage additional sales to financially "weak;firms. A major disadvantage of such a policy is that it is likely to increase;uncollectible accounts.;c. A firm with excess production capacity and relatively low variable costs;would not be;inclined to extend more liberal credit terms to its customers than a firm with;similar;costs that is operating close to capacity.;d. Firms use seasonal dating primarily to decrease their DSO.;e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means;that if the;original sale took place on February 1st, the customer can take the discount up;until;March 15th, but must pay the net invoice amount by April 1st;Which of the following is not correct;for a firm with seasonal sales and customers who;all pay promptly at the end of 30 days?;a. DSO will vary from month to month.;b. The quarterly uncollected balances schedule will be the same in each;quarter.;c. The level of accounts receivable will be constant from month to month.;d. The ratio of accounts receivable to sales will vary from month to month.;e. The level of accounts receivable at the end of each quarter will be the;same.;Seligstine, Inc.'s DSO was 31 days in;March, and 45 days in April. Which of the;following is NOT possible?;a. Sales increased from March to April.;b. Sales decreased from March to April.;c. May's quarterly uncollected balances schedule showed a higher percent of;April's;sales as uncollected than for March.;d. May's quarterly uncollected balances schedule showed a lower percent of;April's;sales as uncollected than for March.;e. All of the above are possible.;Which one of the following aspects of;banks is considered most relevant to businesses;when choosing a bank?;a. Convenience of location.;b. Competitive cost of services provided.;c. Size of the bank's deposits.;d. Experience of personnel.;e. Loyalty and willingness to assume lending risks;You have just taken out a loan for;$75,000. The stated (simple) interest rate on this loan is 10 percent, and the;bank requires you to maintain a compensating balance equal to 15 percent of the;initial face amount of the loan. You currently have $20,000 in your checking;account, and you plan to maintain this balance. The loan is an add-on;installment loan which you will repay in 12 equal monthly installments;beginning at the end of the first month.;How large are your monthly payments?;a. $6,250;b. $7,000;c. $7,500;d. $5,250;e. $6,875;You have just taken out a loan for;$75,000. The stated (simple) interest rate on this loan is 10 percent, and the;bank requires you to maintain a compensating balance equal to 15 percent of the;initial face amount of the loan. You currently have $20,000 in your checking;account, and you plan to maintain this balance. The loan is an add-on;installment loan which you will repay in 12 equal monthly installments;beginning at the end of the first month.;What is the nominal annual add-on interest rate on this loan?;a. 10.00%;b. 16.47%;c. 18.83%;d. 20.00%;e. 24.00%;Suppose you borrow $2,000 from a bank;for one year at a stated annual interest rate of 14;percent, with interest prepaid (a discounted loan). Also, assume that the bank;requires;you to maintain a compensating balance equal to 20 percent of the initial loan;value.;What effective annual interest rate are you being charged?;a. 14.00%;b. 8.57%;c. 16.28%;d. 21.21%;e. 28.00%;Wentworth Greenery harvests its crops;four times annually and receives payment for its;crop 90 days after it is picked and shipped. However, the firm must plant;irrigate, and;harvest on a near continual schedule. The firm uses 90-day bank notes to;finance its;operations. The firm arranges an 11 percent discount interest loan with a 20;percent;compensating balance four times annually. What is the effective annual interest;rate of;these discount loans?;a. 11.00%;b. 15.94%;c. 11.46%;d. 13.75%;e. 12.72%;Assume you borrow $12,000 from the bank;using a 10.19 percent "add-on", one-year;installment loan, payable in four equal quarterly payments. What is the;effective annual;rate of interest?;a. 9.50%;b. 10.19%;c. 15.99%;d. 16.98%;e. 20.38%;XYZ Company needs to borrow $200,000;from its bank. The bank has offered the;company a 12-month installment loan (monthly payments) with 9 percent add-on;interest.;What is the effective annual rate (EAR) of this loan?;a. 16.22%;b. 17.97%;c. 17.48%;d. 18.67%;e. 18.00%;First National Bank of Micanopy has;offered you the following loan alternatives in;response to your request for a $75,000, 1-year loan.;Alternative 1: 7 percent discount interest, with a 10 percent compensating;balance.;Alternative 2: 8 percent simple interest, with interest paid monthly.;What is the effective annual rate on the cheaper loan?;a. 8.00%;b. 7.23%;c. 7.67%;d. 8.43%;e. 8.30%

 

Paper#50968 | Written in 18-Jul-2015

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