finance data bank
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 365day 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 1year 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 365day 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
365day 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 365day 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 pastdue
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
pastdue 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 addon
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 addon
installment loan which you will repay in 12 equal monthly installments,
beginning at the end of the first month.
What is the nominal annual addon 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 90day 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 "addon", oneyear
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 12month installment loan (monthly payments) with 9 percent addon
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, 1year 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%

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