finance data bank
Multiple
Choice Questions
90. East Side, Inc. has no debt outstanding and a
total market value of $136,000. Earnings before interest and taxes, EBIT, are
projected to be $12,000 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 27 percent higher. If there is a
recession, then EBIT will be 55 percent lower. East Side is considering a
$54,000 debt issue with a 5 percent interest rate. The proceeds will be used to
repurchase shares of stock. There are currently 2,000 shares outstanding.
Ignore taxes. If the economy enters a recession, EPS will change by ____
percent as compared to a normal economy, assuming that the firm
recapitalizes.
A. 70.97 percent
B. 63.15 percent
C. 58.08 percent
D. 42.29 percent
E. 38.87 percent
91. North Side, Inc. has no debt outstanding and a
total market value of $175,000. Earnings before interest and taxes, EBIT, are
projected to be $16,000 if economic conditions are normal. If there is strong
expansion in the economy, then EBIT will be 35 percent higher. If there is a
recession, then EBIT will be 70 percent lower. North Side is considering a
$70,000 debt issue with a 7 percent interest rate. The proceeds will be used to
repurchase shares of stock. There are currently 2,500 shares outstanding. North
Side has a tax rate of 34 percent. If the economy expands strongly, EPS will
change by ____ percent as compared to a normal economy, assuming that the firm
recapitalizes.
A. 38.80 percent
B. 45.26 percent
C. 50.45 percent
D. 53.92 percent
E. 61.07 percent
92. Galaxy Products is comparing two different capital
structures, an allequity plan (Plan I) and a levered plan (Plan II). Under Plan
I, Galaxy would have 178,500 shares of stock outstanding. Under Plan II, there
would be 71,400 shares of stock outstanding and $1.79 million in debt
outstanding. The interest rate on the debt is 10 percent and there are no
taxes. What is the breakeven EBIT?
A. $287,878.78
B. $298,333.33
C. $351,111.11
D. $333,333.33
E. $341,414.14
93. ABC Co. and XYZ Co. are identical firms in all
respects except for their capital structure. ABC is all equity financed with
$480,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth
$240,000 and the interest rate on its debt is 11 percent. Both firms expect
EBIT to be $58,400. Ignore taxes. The cost of equity for ABC is _____ percent,
and for XYZ it is ______ percent.
A. 12.17; 12.68
B. 12.17; 12.94
C. 12.17; 13.33
D. 12.29; 12.68
E. 12.29; 13.33
94. Lamont Corp. uses no debt. The weighted average
cost of capital is 11 percent. The current market value of the equity is $38
million and there are no taxes. What is EBIT?
A. $3,423,000
B. $3,508,600
C. $3,781,100
D. $3,898,700
E. $4,180,000
95. The SLG Corp. uses no debt. The weighted average
cost of capital is 12 percent. The current market value of the equity is $31
million and the corporate tax rate is 34 percent. What is EBIT?
A. $4,180,000
B. $4,821,194
C. $5,636,364
D. $6,230,018
E. $6,568,500
96. W.V. Trees, Inc. has a debtequity ratio of 1.4.
Its WACC is 10 percent, and its cost of debt is 9 percent. The corporate tax
rate is 33 percent. What is the firm's unlevered cost of equity capital?
A. 12.38 percent
B. 12.79 percent
C. 13.68 percent
D. 14.10 percent
E. 14.45 percent
97. Bruce & Co. expects its EBIT to be $100,000
every year forever. The firm can borrow at 10 percent. Bruce currently has no
debt, and its cost of equity is 20 percent. The tax rate is 31 percent. What
will the value of Bruce & Co. be if the firm borrows $54,000 and uses the
loan proceeds to repurchase shares?
A. $280,130
B. $346,600
C. $361,740
D. $378,900
E. $381,520
98. Bruce & Co. expects its EBIT to be $100,000
every year forever. The firm can borrow at 11 percent. Bruce currently has no
debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce
will borrow $61,000 and use the proceeds to repurchase shares. What will the
WACC be after recapitalization?
A. 16.30 percent
B. 16.87 percent
C. 17.15 percent
D. 18.29 percent
E. 18.86 percent
99. New Schools, Inc. expects an EBIT of $7,000 every
year forever. The firm currently has no debt, and its cost of equity is 17
percent. The firm can borrow at 8 percent and the corporate tax rate is 34
percent. What will the value of the firm be if it converts to 50 percent
debt?
A. $29,871.17
B. $31,796.47
C. $32,407.16
D. $34,552.08
E. $37,119.30
59. Denver Interiors, Inc., has sales of $836,000 and
cost of goods sold of $601,000. The firm had a beginning inventory of $41,000
and an ending inventory of $47,000. What is the length of the inventory
period?
A. 19.21 days
B. 20.89 days
C. 26.72 days
D. 30.53 days
E. 33.69 days
60. A national firm has sales of $729,000 and cost of
goods sold of $478,000. At the beginning of the year, the inventory was
$37,000. At the end of the year, the inventory balance was $41,000. What is the
inventory turnover rate?
A. 12.26 times
B. 12.78 times
C. 14.22 times
D. 18.56 times
E. 19.70 times
61. North Side Wholesalers has sales of $948,000. The
cost of goods sold is equal to 72 percent of sales. The firm has an average
inventory of $23,000. How many days on average does it take the firm to sell its
inventory?
A. 11.24 days
B. 12.30 days
C. 16.48 days
D. 26.35 days
E. 29.68 days
62. The Bear Rug has sales of $811,000. The cost of
goods sold is equal to 63 percent of sales. The beginning accounts receivable
balance is $41,000 and the ending accounts receivable balance is $38,000. How
long on average does it take the firm to collect its receivables?
A. 17.26 days
B. 17.78 days
C. 18.58 days
D. 20.44 days
E. 29.77 days
63. The Blue Star has sales of $387,000, costs of
goods sold of $259,000, average accounts receivable of $9,800, and average
accounts payable of $12,600. How long does it take for the firm's credit
customers to pay for their purchases?
A. 7.67 days
B. 8.78 days
C. 9.24 days
D. 11.88 days
E. 13.81 days
64. The Mountain Top Shoppe has sales of $512,000,
average accounts receivable of $31,400 and average accounts payable of $24,800.
The cost of goods sold is equivalent to 71 percent of sales. How long does it
take The Mountain Top Shoppe to pay its suppliers?
A. 21.76 days
B. 22.38 days
C. 24.90 days
D. 25.89 days
E. 26.67 days
65. HG Livery Supply had a beginning accounts payable
balance of $57,300 and an ending accounts payable balance of $55,100. Sales for
the period were $610,000 and costs of goods sold were $442,000. What is the
payables turnover rate?
A. 7.86 times
B. 8.39 times
C. 9.02 times
D. 9.86 times
E. 10.85 times
66. Your firm has an inventory turnover rate of 14, a
payables turnover rate of 8, and a receivables turnover rate of 19. How long is
your firm's operating cycle?
A. 45.06 days
B. 45.28 days
C. 45.63 days
D. 53.13 days
E. 53.78 days
67. Merryl Enterprises currently has an operating
cycle of 62 days. The firm is analyzing some operational changes, which are
expected to increase the accounts receivable period by 2 days and decrease the
inventory period by 5 days. The accounts payable turnover rate is expected to
increase from 42 to 46 times per year. If all of these changes are adopted,
what will the firm's new operating cycle be?
A. 51 days
B. 57 days
C. 59 days
D. 60 days
E. 65 days
68. On average, Furniture & More is able to sell
its inventory in 27 days. The firm takes 87 days on average to pay for its
purchases. On the other hand, its average customer pays with a credit card
which allows the firm to collect its receivables in 4 days. Given this
information, what is the length of operating cycle?
A. 31 days
B. 38 days
C. 45 days
D. 56 days
E. 62 days
69. Interior Designs has an inventory period of 46
days, an accounts payable period of 38 days, and an accounts receivable period
of 32 days. Management is considering an offer from their suppliers to pay
within 10 days and receive a 2 percent discount. If the new discount is taken,
the accounts payable period is expected to decline by 26 days. If the new
discount is taken, the operating cycle will be _____ days.
A. 52
B. 62
C. 71
D. 78
E. 91
70. Metal Products Co. has an inventory period of 53
days, an accounts payable period of 68 days, and an accounts receivable
turnover rate of 18. What is the length of the cash cycle?
A. 3.00 days
B. 5.28 days
C. 26.28 days
D. 71.00 days
E. 73.28 days
71. West Chester Automation has an inventory turnover
of 16 and an accounts payable turnover of 11. The accounts receivable period is
36 days. What is the length of the cash cycle?
A. 5.67 days
B. 25.63 days
C. 41.00 days
D. 52.00 days
E. 58.81 days
72. Peterson's Antiquities currently has a 31 day cash
cycle. Assume the firm changes its operations such that it decreases its
receivables period by 2 days, decreases its inventory period by 3 days, and
decreases its payables period by 4 days. What will the length of the cash cycle
be after these changes?
A. 22 days
B. 23 days
C. 29 days
D. 30 days
E. 31 days
73. A company currently has a 48 day cash cycle.
Assume the firm changes its operations such that it decreases its receivables
period by 2 days, increases its inventory period by 3 days, and increases its
payables period by 4 days. What will the length of the cash cycle be after
these changes?
A. 42 days
B. 43 days
C. 45 days
D. 47 days
E. 49 days
74. Tall Guys Clothing has a 45 day collection period.
Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and
$2,300, respectively, by quarter, starting with the first quarter of the year.
Given this information, which one of the following statements is correct?
Assume a year has 360 days.
A. The firm will collect $800 in Quarter 2.
B. The accounts receivable balance at the beginning of Quarter 4 will be
$1,150.
C. The firm will collect $2,000 in Quarter 3.
D. The firm will have an accounts receivable balance of $2,300 at the end
of the year.
E. The firm will collect a total of $2,400 in Quarter 4.

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