1) What differentiates "discretionary financing needs" from "external financing needs?"

1) What differentiates "discretionary financing needs" from "external financing needs?"

   A) assets
   B) retained earnings
   C) spontaneous liabilities
   D) sales

2) The quick ratio of a firm would be unaffected by which of the following?

   A) land held for investment is sold for cash

   B) inventories are sold on a short-term credit basis
   C) equipment is purchased, financed by a long-term debt issue
   D) inventories are sold for cash

3) The current ratio of a firm would be decreased by which of the following?
   A) Land held for investment is sold for cash.
   B) Inventories are sold on a long-term credit basis.
   C) Equipment is purchased, financed by a long-term debt issue.
   D) Inventories are sold for cash.

4) Strategies to counter exchange rate risk include all of the following except

  A) spot-market hedges.
  B) forward-market hedges.
  C) futures contracts.
  D) money-market hedges.

5) Firms generally do not hedge against which type of exposure?  

    A) economic
    B) transaction
    C) financial
    D) translation


6) Which of the following is the initial and most important step in the preparation of pro forma

 

financial statements?

    A) Estimate the levels of investment in current and fixed assets.
    B) Approximate the cost of raw materials.
    C) Project the firm's sales revenues for the planning period.
    D) Determine the rate of interest that will be required for borrowed funds.


7) Assume that a firm has determined that its investment in accounts receivable is getting too large relative to its sales volume. Which of the following courses of action would be best for it to take in order to improve the collection of accounts receivable in future periods?

    A) sell more products
    B) change the color of the firm's invoices
    C) allow customers more time to pay for products
    D) raise the firm's credit standards
    E) reduce product quality control requirements

8) Capital market instruments include
A) commercial paper.
B) Treasury bills.
C) corporate equities.
D) negotiable certificates of deposit.


9) Activities of the investment banker include
A) providing advice to firms issuing securities.
B) selling new securities to the ultimate investors.
C) assuming the risk of selling a security issue.
D) All of the above


10) Financial intermediaries

A) include the national and regional stock exchange.
B) offer indirect securities.
C) constitute the various secondary markets.
D) usually are underwriting syndicates.


11) An example of a primary market transaction involving a money market security is

A) a new issue of a security with a very short maturity.
B) the transfer of a previously issued security with a very long maturity.
C) a new issue of a security with a very long maturity.
D) the transfer of a previously issued security with a very short maturity.


12) Which of the following refers to all institutions and procedures that provide for transactions in short-term debt instruments generally issued by borrowers with very high credit ratings?
A) stock market
B) commercial banks
C) capital market
D) money market

13) Why is the quick ratio a more refined liquidity measure than the current ratio?

A) Inventories are generally the least liquid of the firm's current assets.
B) Inventories are generally among the most liquid of the firm's current assets.
C) It measures how "quickly" cash and other liquid assets flow through the company.
D) Cash is the most liquid current asset.

14) Which of the following ratios would be the poorest indicator of how rapidly the firm's credit accounts are being collected?

A) accounts receivable turnover ratio
B) cash conversion cycle
C) inventory turnover
D) average collection period

15) A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio?

A) leverage
B) efficiency
C) liquidity
D) profitability

16) Which of the following ratios would you rely upon the most in order to determine a corporation's ability to meet its required interest payments?

A) total asset turnover
B) times interest earned
C) debt ratio
D) net profit margin

 

 

CLICK HERE FOR THE SOLUTION

Best View manufactures sophisticated digital cameras.

Best View manufactures sophisticated digital cameras. The company’s new models are very popular, but it has an inventory of 1,000 old models for which there is little demand. Decision to Sell or Rebuild Deficient Units Best View manufactures sophisticated digital cameras. The company’s new models are very popular, but it has an inventory of 1,000 old models for which there is little demand. Best View is considering the following options for disposing of these old models: 1. Sell them to a discount mail-order company at a total price of $150,000. The mail-order firm would then sell these old models at a unit price of $399. 2. Convert them to new models at a remanufacturing cost of $700 per unit. These new models then could be sold to camera stores for $1200 each. The old models had been manufactured at a cost of $450 per unit. The cost of manufacturing new models of the same size, however, normally amounts to $800 per unit. INSTRUCTIONS a. Perform an incremental analysis of the revenue, costs, and profit resulting from converting the old models to new models as compared with selling them to the mail-order firm. b.) Identify any sunk costs, out of pocket costs, and possible opportunity costs. c.) Indicate which of these options you would select and explain your reasoning, assuming that Best View currently:

CLICK HERE FOR THE SOLUTION

Best View manufactures sophisticated digital cameras.

Best View manufactures sophisticated digital cameras. The company’s new models are very popular,

 but it has an inventory of 1,000 old models for which there is little demand.

Decision to Sell or Rebuild Deficient Units

Best View manufactures sophisticated digital cameras. The company’s new models are very popular,

 but it has an inventory of 1,000 old models for which there is little demand. Best View is considering

 the following options for disposing of these old models:

1. Sell them to a discount mail-order company at a total price of $150,000. The mail-order firm would

 then sell these old models at a unit price of $399.

2. Convert them to new models at a remanufacturing cost of $700 per unit. These new models then

 could be sold to camera stores for $1200 each.

The old models had been manufactured at a cost of $450 per unit. The cost of manufacturing new

 models of the same size, however, normally amounts to $800 per unit.

INSTRUCTIONS

       a.) Perform an incremental analysis of the revenue, costs, and profit resulting from converting the

          old models to new models as compared with selling them to the mail-order firm.

       b.) Identify any sunk costs, out of pocket costs, and possible opportunity costs.

       c.) Indicate which of these options you would select and explain your reasoning, assuming that

 Best View currently:

1. Has substantial excess capacity.

2. Is operating at full capacity manufacturing new models.

CLICK HERE FOR THE SOLUTION

Kelp Company produces three joint products from seaweed.

Kelp Company produces three joint products from seaweed. At the split-off point, three basic  products emerge: Sea Tea, Sea Paste, and Sea Powder. Joint Products Kelp Company produces three joint products from seaweed. At the split-off point, three basic products emerge: Sea Tea, Sea Paste, and Sea Powder. Each of these  products can either be sold at the split-off point or be processed further.  If they are processed further, the resulting products can be sold as delicacies to health food stores.  Cost and revenue information is as follows: Sales Value and Additional Costs if Processed Further Product Pounds Sales Value Final Sales Value Additional Cost Produced @ Split-off Sea Tea….. 9,000 $60,000 $90,000 $35,000 Sea Paste…. 4,000 $80,000 $160,000 $50,000 Sea Powder… 2,000 $70,000 $85,000 $14,000 INSTRUCTIONS a.) Which products should Kelp process beyond the split-off point? b.) At what price per pound would it be advantageous for Kelp Company to sell Sea Paste at the split -off point rather than process it further? CLICK HERE FOR THE SOLUTION

AT&T Corp has several issues of bonds outstanding.

AT&T Corp has several issues of bonds outstanding. One of the outstanding bonds has a 5 &1/8  percent coupon and matures in 2004. The bonds mature on April 1 in the maturity year. Suppose  an investor bought this bond on April 1 1999, and assume interest is paid annually on April 1.  calculate the yield to maturity assuming the investor buys the bond at the following price, as quoted in the financial press: a. 100 b 90 c 105 CLICK HERE FOR THE SOLUTION

Southern Bell has issued 4 3/8 percent bonds that mature on August 1 2011.

Southern Bell has issued 4 3/8 percent bonds that mature on August 1 2011.  Assume that interest is paid and compounded annually. Determine the  yield to maturity if an investor purchase a $1000.00 denomination bond  for $853.75 on August 1, 2004. CLICK HERE FOR THE SOLUTION

Problem 1 Management is considering purchasing an asset for $20,000 that would have a useful life

Problem 1 Management is considering purchasing an asset for $20,000 that would have a useful life  of 10 years and no salvage value. For tax purposes, the entire original cost of the asset would be  depreciated over 10 years using the straight-line method. The asset would generate annual net  cash inflows of $12,000 throughout its useful life. The project would require additional working  capital of $6,000, which would be released at the end of the project. The company's tax rate is  40% and its discount rate is 13%. Questions: What is the annual NET (after tax) Cash Inflows? (4 points) What is the annual Depreciation Deduction? (4 points) What is the Net Present Value for this project? (12 points) CLICK HERE FOR THE SOLUTION

Problem 2 ABC Outlet Store is looking for a new location near a shopping mall.

Problem 2 ABC Outlet Store is looking for a new location near a shopping mall. It is considering purchasing a  building rather than leasing, as it has done in the past. Three retail buildings near a new mall are available  but each has its own advantages and disadvantages. The owner of the company has completed an analysis  of each location that includes considerations for the time value of money. The information is as follows Location A Location B Location C Internal rate of return 13% 17% 20% Net present value $25,000 $40,000 $20,000 The owner does not understand how the location with the highest percentage return has the lowest net present value. Explain to the owner what is (are) the probable cause(s) of the comparable differences (10 points) CLICK HERE FOR THE SOLUTION

Consider a bond with face value of $1,000.The coupon payment is made semi-annually and the yield to

Consider a bond with face value of $1,000.The coupon payment is made semi-annually and the yield to

 maturity on the bond is 12% (effective annual yield). How much would you pay for the bond if:

a) The coupon rate is 8% and the time to maturity is 20 years?

b) The coupon rate is 10% and the time to maturity is 15 years?

CLICK HERE FOR THE SOLUTION

5-10 HexCorp Inc. has two different bonds currently outstanding. Bond A has a face value of $40,000

5-10 HexCorp Inc. has two different bonds currently outstanding. Bond A has a face value of $40,000

and matures in 20 years

Corporate Finance, Seventh Edition

5-10 HexCorp Inc. has two different bonds currently outstanding. Bond A has a face value of $40,000

 and matures in 20 years. The bond makes no payments for the first 6 years, pays $2,000 semiannually

 for the subsequent 8 years and finally pays $2,500 semiannually for the last 6 years. Bond B also has

 a face value of $40,000 and matures in 20 years. However, it makes no coupon payments over the life

 of the bond. If the stated annual interest rate is 12 %, compounded semiannually,

a) What is the price of Bond A?

b) What is the price of Bond B?

CLICK HERE FOR THE SOLUTION

ABC has a P/E ratio of 12 and maintains a dividend payout ratio of 40%.

ABC has a P/E ratio of 12 and maintains a dividend payout ratio of 40%. The stock price of ABC on

 January 1st. is $32. What would be the value of the stock if the dividend payout ratio were 60%?

CLICK HERE FOR THE SOLUTION

Assume the company closes its books on December 31st:

Assume the company closes its books on December 31st:

Arty Co. sells $250,000 of 10% (stated rate) bonds on March 1, 2007. The bonds pay interest

September 1 and March 1. The due date of the bonds is September 1, 2010. The bonds yield 12%

(market rate). Give entries through December 21, 2008.

Instructions:

 Prepare all of the relevant journal entries from the time of the sale until the date indicated.

 Use the effective interest method for discount and premium amortization. Construct the

 relevant amortization tables. Amortize the premium or discount on interest dates and at

 year-end. (assume no reversing entries were made).

CLICK HERE FOR THE SOLUTION

Purchase, cost of goods sold, and cash collection budgets

Purchase, cost of goods sold, and cash collection budgets

The Zel Company operates at local flea markets. It has budgeted the following

 sales for the indicated months.

JUNE JULY August

Sales on account $1,500,000 $1,600,000 $1,700,000

Cash sales 200,000 210,000 220,000

Total sales $1,700,000 $1,810,000 $1,920,000

Zel's success in this specialty market is due in large part to the extension of credit terms and the

 budgeting techniques implemented by the firm's owner Barbara Zel. Ms. Zel is a recycler; that

 is, she collects her merchandise daily at neighborhood garage sales and sells the merchandise

 weekly at regional flea markets. All merchandise is marked up to sell at its invoice cost (as

 purchased at garage sales) plus 25%. Stated differently, cost is 80% of selling price.

 Merchandise inventories at the beginning of each month are 30% of that month's forecasted cost

 of goods sold. With respect to sales on account, 40% of receivables are collected in the month of

 sale, 50% are collected in the month following, and 10% are never collected.

Question:

What is the anticipated cost of goods sold for June, what is the beginning inventory for July

 expected to be, what are July purchases expected to be, and what are the forecasted July cash

 collections?

CLICK HERE FOR THE SOLUTION

The following data for Kitchen Tile Company related to the production of 18,000 tiles during the past month.

The following data for Kitchen Tile Company related to the production of 18,000 tiles during the past month.

The company allocates fixed overhead costs at a standard rate of $19 per direct labor hour.

Direct Labor:

Standard cost is 6 tiles per hour at $24.00 per hour

Actual cost per hour was $24.50

Labor efficiency variance was $6,720 F

Fixed overhead costs:

Estimated = $60,000

Actual = $58,720

Question:

How many actual labor hours were worked to produce the 18,000 tiles, what is the price variance

 for direct labor, and what is the budget variance for fixed cost?

CLICK HERE FOR THE SOLUTION

The product-mix decision.

The product-mix decision. XYZ Company produces Product A, Product B, and Product C. All three

 products require processing on specialized finishing machines. The capacity of these machines is

 1,800 hours per month. XYZ Company wishes to determine the product mix that should be achieved

 to meet the high demand for each product and provide the maximum profit. Following is information

 about each product:

Product A Product B Product C

Selling price..............$150 $120 $38

Variable costs............105 60 30

Machine time per unit..3 hours 2 hours 1 hour

Monthly demand (units) 450 300 750

Required:

Determine how the 1,800 hours of machine time should be allocated to the three products to provide

 the most profitable product mix

CLICK HERE FOR THE SOLUTION

1. Consider a call option for the Intel stock with the exercise price of $20. Today is the expiration date.

1. Consider a call option for the Intel stock with the exercise price of $20. Today is the expiration date.

 If the stock price is $21.50 today, what is the current value of the option?

2. Consider a put option for the Intel stock. The exercise price of the option is $20. If the stock price is

 $21.50 today, the expiration date, what is the current value of the option?

3. Suppose that you bought the Intel stock at $21.50 per share, and that you paid $2 to buy its put

 option with the strike price of $20. It the stock price is $30 on the expiration date, what is the

total profit per share from the investment?

4. ABC Company recently issued two types of bonds. The first issue consisted of 20-year straight debt

 with an 8 percent annual coupon. The second issue consisted of 20-year bonds with a 6 percent annual

 coupon and attached warrants. Both issues sold at their $1,000 par values. What is the implied value

 of the warrants attached to each bond?

5. Consider a company’s 15 year, 9% coupon convertible bond with a $1,000 par value and the

 conversion ratio of 40. Its current price is $950, and its equivalent regular coupon bond yields 12%.

 These bonds are annual bonds. What is the value of the call option embedded in the convertible bond?

CLICK HERE FOR THE SOLUTION 

ABC Company recently issued two types of bonds.

ABC Company recently issued two types of bonds. The first issue consisted of 20-year straight debt with an

 8 percent annual coupon. The second issue consisted of 20-year bonds with a 6 percent annual coupon and

 attached warrants. Both issues sold at their $1,000 par values. What is the implied value of the warrants

 attached to each bond? 

CLICK HERE FOR THE SOLUTION

Consider a company’s 15 year, 9% coupon convertible bond with a $1,000 par value and the conversion

Consider a company’s 15 year, 9% coupon convertible bond with a $1,000 par value and the conversion

ratio of 40. Its current price is $950, and its equivalent regular coupon bond yields 12%. These bonds are

 annual bonds. What is the value of the call option embedded in the convertible bond?

CLICK HERE FOR THE SOLUTION

A food processing company is considering adopting a new seafood processing system.

A food processing company is considering adopting a new seafood processing system. The system

 will cost $750,000 plus $23,000 for shipping and installation. It will result in an increase of

 $5,000 in the net working capital at the beginning. No further change in the net working

capital is expected after the system is put into operation.

The expected economic life of the unit is five years. It will be depreciated under the 5-year class

 of MACRS for the tax purpose. At the end of five years, the machine will be expected to

 sell for $80,000 and the accumulated change in the net working capital will be fully recovered.

After the firm adopts the new system, its annual revenues will be expected to increase by

$80,000 and its annual operating costs will be expected to decrease by $25,000.

The company’s tax rate is 40%. The 3-month T-bill yield is 5%, the market return is 15% and the project’s

 beta is 0.7. Should the company take the project? Why? (20 points)

CLICK HERE FOR THE SOLUTION

Bankserv, an IT company specialized in financial IT solutions is considering buying a new data

Bankserv, an IT company specialized in financial IT solutions is considering buying a new data  processing and management information system. The system, including computer hardware and software, will cost $750,000. Delivery and installation of the system is expected to add  $5,000 to this cost. The system will be placed in a small building owned by the company.  The building is currently vacant and would be sold for $90,000 after tax in the absence  of the system. To put the new system in place, the company expects to invest $48,000 in net working capital immediately and increase $12,000 in net working capital at the end of year 1.  Bankserv has spent $27,000 on a feasibility study on the project. The system has an expected economic life of 10 years. It will be depreciated as a 7-year asset under  MACRS rules. Actual salvage value at the end of 10 years is expected to be $50,000 and the  company plans to sell the system for its savage value at that time.  The new data processing system will save the company a fee of $190,000 per year that it currently  pays to a computer time-sharing company. Operating, maintenance, and insurance costs for the  system are estimated to total $50,000 during the first year. These costs are expected to increase at a  rate of 7 percent per year over the 10-year period. Bankserv plans to sell excess computer time to a number of local firms. The demand function for  this service during year 1 is estimated to be: Q = 20,000 - 200P Where Q = number of units of computer time sold P = price per unit of computer time sold An analysis of the local market for computer time makes the company believe that it can charge $14  per unit of computer time. Although Bankserv does not anticipate changing this charge over the 10- year period, it expects the quantity demanded to decline by 5 percent per year after year 1. It is  expected that these outside sales of computer time will cost the company an additional $40,000 per  year in computer operating costs (including the salary of computer service representatives to handle  the new customers). These additional operating costs are expected to increase at rate of 7 percent  annually over the 10-year period. Bankserve has a marginal tax rate of 34 percent. This rate is expected to remain in effect over the  life of the project. The project will be financed 20 percent by debt and 80 percent by equity. The pre -tax required rate of return on debt is 7.58 percent and the pre-tax required rate of return on equity is  15 percent. Inflation rate is assumed to be zero. Based on the information contained in the case and whatever assumptions you feel you need to make, use NPV approach to determine whether Bankserv should acquire the new data processing system. CLICK HERE FOR THE SOLUTION