ASHWORTH C09 EXAM 7/ASHWORTH C09 EXAM 7.
Question
Part 1 of 2 – Lesson 6 Questions 45.0/ 50.0 Points
Question 1 of 40 2.5/ 2.5 Points
Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate Weighted Average Cost of Capital (WACC) for an average-risk project in the expansion division. Richard finds two publicly traded stand alone firms that produce the same products as his new division. The average of the two firms’ betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Richard’s firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?
A. about 12.64%
B. about 13.00%
C. about 10.78%
D. about 11.29%
Question 2 of 40 2.5/ 2.5 Points
In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.
A. Weighted Average Cost of Capital (WACC)
B. Internal Rate of Return (IRR)
C. cost of debt
D. cost of Equity
Question 3 of 40 2.5/ 2.5 Points
Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?
A. Rd ÷ (1 + Tc)
B. Rd ÷ (1 – Tc)
C. Rd × (1 – Tc)
D. Rd × (1 + Tc)
Question 4 of 40 2.5/ 2.5 Points
If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur?
A. Low-risk projects could be rejected when in fact they are good investment choices.
B. High-risk projects could be accepted when in fact they are poor investment choices.
C. High-risk projects could be accepted when in fact they are good investment choices.
D. All of the choices could occur when using a single discount rate for all projects.
Question 5 of 40 2.5/ 2.5 Points
The __________ is the return that the bank or bondholder demands on new borrowing.
A. Internal Rate of Return (IRR.
B. Weighted Average Cost of Capital (WACC)
C. cost of equity
D. cost of debt
Question 6 of 40 0.0/ 2.5 Points
Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.
A. 13.13%
B. 10.50%
C. 31.25%
D. There is not enough information to answer this question.
Question 7 of 40 2.5/ 2.5 Points
Which of the statements below is NOT true?
A. Preferred stock is a form of hybrid equity financing.
B. Retained earnings are a form of hybrid equity financing.
C. Common stock is a form of equity financing.
D. Corporate bonds are a form of debt financing.
Question 8 of 40 2.5/ 2.5 Points
Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?
A. 10.67%
B. 10.20%
C. 10.00%
D. 9.67%
Question 9 of 40 2.5/ 2.5 Points
The cost of capital is __________ .
A. the cost of debt in a firm that finances with both debt and equity
B. the cost of each financing component multiplied by that component’s percent of the total borrowed
C. another name for the Internal Rate of Return (IRR)
D. all of the above
Question 10 of 40 2.5/ 2.5 Points
Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place. The proceeds from the sale of the bond issue are $975.00 per bond. What is your firm’s yield to maturity on this new bond issue? Use a financial calculator to determine your answer.
A. 5.15%
B. 10.16%
C. 10.30%
D. 10.00%
Question 11 of 40 2.5/ 2.5 Points
It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s __________ when doing capital budgeting.
A. life
B. cash flows
C. riskiness
D. managers
Question 12 of 40 2.5/ 2.5 Points
__________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
A. Capital structure
B. Cost of capital
C. Working capital management
D. Net Present Value (NPV)
Question 13 of 40 2.5/ 2.5 Points
Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm’s existing capital structure. If the cost of debt is 11.00%, the cost of preferred stock is 12.00%, the cost of common stock is 17.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 15.00%, what is the Internal Rate of Return (IRR) of the project, given the expected cash flows listed here? Use a financial calculator to determine your answer.
Category T0 T1 T2 T3
Investment -$3,000,000
Net Working Capital (NWC. -$350,000 $350,000
Operating Cash Flow $1,200,000 $1,200,000 $1,200,000
Salvage $50,000
Total Incremental Cash Flow -$3,350,000 $1,200,000 $1,200,000 $1,600,000
A. About 13.11%
B. About 12.02%
C. About 11.16%
D. About 8.94%
Question 14 of 40 2.5/ 2.5 Points
Which of the following would be classified as debt lenders for a firm?
A. preferred shareholders, banks, and nonbank lenders
B. nonbank lenders, common shareholders, and commercial banks
C. preferred shareholders, common shareholders, and suppliers
D. suppliers, nonbank lenders, and commercial banks
Question 15 of 40 2.5/ 2.5 Points
The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equal $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm’s Weighted Average Cost of Capital (WACC) adjusted for taxes.
A. 10.11%
B. 10.00%
C. 9.09%
D. There is not enough information to answer this question.
Question 16 of 40 2.5/ 2.5 Points
The cost of debt could be which of the following?
A. the required return on money borrowed as a long-term loan from a bank
B. the required return on money borrowed from a venture capitalist
C. the yield-to-maturity on money raised by selling bonds
D. All of the choices above could be considered the cost of debt.
Question 17 of 40 0.0/ 2.5 Points
The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding. Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding, selling at $120.00 per share, and 500 outstanding long-term bonds selling for $1,035.00 each. For purposes of estimating the firm’s Weighted Average Cost of Capital (WACC) what are the market value weights of long-term debt, preferred stock, and equity?
A. D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%
B. D/V = 10.27%, PS/V = 2.38%, and E/V = 87.34%
C. D/V = 10.78%, PS/V = 3.08%, and E/V = 86.14%
D. D/V = 33.33%, PS/V = 33.33%, and E/V = 33.33%
Question 18 of 40 2.5/ 2.5 Points
Red Rider Bike Shop (RRBS) has an adjusted Weighted Average Cost of Capital (WACC) of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. RRBS is considering expanding by building a new shop in a distant city and considers the project to be riskier than the current operation. RRBS has an existing beta of 1.0, the required return on the market portfolio to be 11.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.30. Given this information, and assuming the cost of debt will not change if RRBS undertakes the new project, what adjusted WACC should be used in decision-making?
A. 8.56%
B. 9.84%
C. 10.00%
D. 11.24%
Question 19 of 40 2.5/ 2.5 Points
Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 0.80, the required return in the market place is 12.50%, and the risk-free rate of return is 3.50%.
A. 13.50%
B. 10.70%
C. 7.20%
D. 2.80%
Question 20 of 40 2.5/ 2.5 Points
The formula for the Weighted Average Cost of Capital (WACC) adjusted is __________ .
A) the average of the cost of each financing component, weighted by the proportion of each component
B) the cost of capital for the firm as a whole
C) made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity
D) All of the above
Part 2 of 2 – Lesson 7 Questions 40.0/ 50.0 Points
Question 21 of 40 2.5/ 2.5 Points
When a company deals only in cash, the cash conversion cycle becomes _________ .
A. the collection cycle
B. the payable cycle
C. the production cycle
D. the collection cycle – the payable cycle
Question 22 of 40 2.5/ 2.5 Points
When using the ABC Inventory Management System, Type A items are__________ .
A. small-dollar items
B. nonessential inventory items
C. large-dollar or critical inventory items
D. moderate-dollar items
Question 23 of 40 2.5/ 2.5 Points
With energy costs greater than ever, Berwick’s Bike Shop is well-placed for an expansion. Its initial capital cost (not including working capital) is $750,000, expected after-tax operating cash flow is $225,000 per year for five years, and the recovery of capital assets after five years is $75,000. If this project has a required rate of return of 15% and the initial cost of working capital is $100,000, should Berwick expand the bike shop? (Assume that the $100,000 of working capital is recovered in Year five at the end of the project life) Compute a Net Present Value (NPV) to support your decision..
A. Yes, because the NPV = $8,759
B. No, because the NPV = -$850,000
C. No, because the NPV = -$8,759
D. Yes, because the NPV = $858,759
Question 24 of 40 0.0/ 2.5 Points
Of the following, which is NOT an accurate statement about the Economic Order Quantity (EOQ) model?
A. The actual cost of the inventory item is ignored.
B. Costs are divided into two categories: the cost of ordering and the cost of storage.
C. EOQ is an attempt to determine the appropriate level of inventory.
D. The EOQ assumes the sales rate fluctuates with seasonal changes.
Question 25 of 40 2.5/ 2.5 Points
Using the information provided, what is the collection cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 6.84 days
B. 7.60 days
C. 10.34 days
D. 12.41 days
Question 26 of 40 2.5/ 2.5 Points
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the accounts payable turnover for the firm?
A. 15 times
B. 60 times
C. 75 times
D. 90 times
Question 27 of 40 0.0/ 2.5 Points
In terms of the float, the buyer of a product wants to ________ and the seller wants to __________ .
A. increase the collection float; decrease the disbursement float
B. decrease the disbursement float; decrease the collection float
C. decrease the collection float; decrease the disbursement float
D. increase the disbursement float; decrease the collection float
Question 28 of 40 2.5/ 2.5 Points
BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. The firm’s CEO wants to know the anticipated cash flow for April. Use the following information to estimate April cash flows.
First Quarter Actual Billings Second Quarter Anticipated Billings
January February March April May June
$88,000 $74,000 $96,000 $99,000 $82,000 $63,000
A. $96,000
B. $77,600
C. $84,640
D. $99,000
Question 29 of 40 2.5/ 2.5 Points
Lipscomb is set to establish a reorder policy for his remote snack bar located on Vacation Island. He sells 10 cases of soda per day and has a lead-time for delivery of one week. Occasionally, bad weather or mechanical difficulty can delay his delivery by up to three days. At what point should Lipscomb reorder (how many cases on hand) if he wants to also compensate for unexpected order delays?
A. 30 cases
B. 70 cases
C. 100 cases
D. There is not enough information to answer this question
Question 30 of 40 2.5/ 2.5 Points
Using the information provided, what is the inventory turnover for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 23.53 times
B. 53.33 times
C. 48.00 times
D. 60.00 times
Question 31 of 40 2.5/ 2.5 Points
Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy?
A. $1,250,000
B. $8,000,000
C. $9,250,000
Question 32 of 40 2.5/ 2.5 Points
Using the information provided, what is the accounts payable cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 4.06 days
B. 4.87 days
C. 6.08 days
D. 24.33 days
Question 33 of 40 2.5/ 2.5 Points
Using the information provided, what is the length of the production cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 6.08 days
B. 7.60 days
C. 53.33 days
D. 6.84 days
Question 34 of 40 2.5/ 2.5 Points
Which of the following is NOT true of the cash conversion cycle?
A. It is the net period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.
B. Cash Conversion Cycle = Production Cycle + Collection Cycle – Payment Cycle
C. Cash Conversion Cycle = Production Cycle + Collection Cycle + Payment Cycle
D. The cash conversion cycle essentially measures how quickly a company can convert its products or services into cash.
Question 35 of 40 2.5/ 2.5 Points
The __________ is the period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.
A. cash conversion cycle
B. accounts receivable cycle
C. current ratio
D. business operating cycle
Question 36 of 40 0.0/ 2.5 Points
The __________ starts at the time production begins and ends with the collection of cash from the sale of the product.
A. accounts receivable cycle
B. business operating cycle
C. cash conversion cycle
D. production cycle
Question 37 of 40 2.5/ 2.5 Points
Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. Ready Tees plans on ordering t-shirts 12 times over the next year. Ready Tees receives the same number of t-shirts each time it orders. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the annual ordering cost of the t-shirt inventory (rounded to the nearest dollar)?
A. $5,000
B. $6,000
C. $10,000
D. $12,000
Question 38 of 40 0.0/ 2.5 Points
Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?
A. $25,000,000
B. $9,250,000
C. $450,000
D. $8,000,000
Question 39 of 40 2.5/ 2.5 Points
A __________ inventory item is an item that is not used in current operations but is serving a back-up role in case the current item fails during operation.
A. type C
B. redundant
C. reticent
D. beta generation
Question 40 of 40 2.5/ 2.5 Points
Extending credit to a customer has three major components: ____________ .
A. a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy for collecting overdue bills
B. a policy on how customers will qualify for credit, a policy on paying commissions on sales, and a policy for collecting overdue bills
C. a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy on accounting for depreciation
D. a policy on how customers will qualify for credit, a policy on accounting for depreciation, and a policy on paying commissions on sales
Part 1 of 2 – Lesson 6 Questions 45.0/ 50.0 Points
Question 1 of 40 2.5/ 2.5 Points
Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate Weighted Average Cost of Capital (WACC) for an average-risk project in the expansion division. Richard finds two publicly traded stand alone firms that produce the same products as his new division. The average of the two firms’ betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Richard’s firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?
A. about 12.64%
B. about 13.00%
C. about 10.78%
D. about 11.29%
Question 2 of 40 2.5/ 2.5 Points
In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.
A. Weighted Average Cost of Capital (WACC)
B. Internal Rate of Return (IRR)
C. cost of debt
D. cost of Equity
Question 3 of 40 2.5/ 2.5 Points
Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?
A. Rd ÷ (1 + Tc)
B. Rd ÷ (1 – Tc)
C. Rd × (1 – Tc)
D. Rd × (1 + Tc)
Question 4 of 40 2.5/ 2.5 Points
If all projects are assigned the same discount rate for purposes of evaluation, which of the following could occur?
A. Low-risk projects could be rejected when in fact they are good investment choices.
B. High-risk projects could be accepted when in fact they are poor investment choices.
C. High-risk projects could be accepted when in fact they are good investment choices.
D. All of the choices could occur when using a single discount rate for all projects.
Question 5 of 40 2.5/ 2.5 Points
The __________ is the return that the bank or bondholder demands on new borrowing.
A. Internal Rate of Return (IRR.
B. Weighted Average Cost of Capital (WACC)
C. cost of equity
D. cost of debt
Question 6 of 40 0.0/ 2.5 Points
Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.
A. 13.13%
B. 10.50%
C. 31.25%
D. There is not enough information to answer this question.
Question 7 of 40 2.5/ 2.5 Points
Which of the statements below is NOT true?
A. Preferred stock is a form of hybrid equity financing.
B. Retained earnings are a form of hybrid equity financing.
C. Common stock is a form of equity financing.
D. Corporate bonds are a form of debt financing.
Question 8 of 40 2.5/ 2.5 Points
Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?
A. 10.67%
B. 10.20%
C. 10.00%
D. 9.67%
Question 9 of 40 2.5/ 2.5 Points
The cost of capital is __________ .
A. the cost of debt in a firm that finances with both debt and equity
B. the cost of each financing component multiplied by that component’s percent of the total borrowed
C. another name for the Internal Rate of Return (IRR)
D. all of the above
Question 10 of 40 2.5/ 2.5 Points
Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place. The proceeds from the sale of the bond issue are $975.00 per bond. What is your firm’s yield to maturity on this new bond issue? Use a financial calculator to determine your answer.
A. 5.15%
B. 10.16%
C. 10.30%
D. 10.00%
Question 11 of 40 2.5/ 2.5 Points
It is necessary to assign the appropriate cost of capital for each individual project that reflects that project’s __________ when doing capital budgeting.
A. life
B. cash flows
C. riskiness
D. managers
Question 12 of 40 2.5/ 2.5 Points
__________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.
A. Capital structure
B. Cost of capital
C. Working capital management
D. Net Present Value (NPV)
Question 13 of 40 2.5/ 2.5 Points
Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm’s existing capital structure. If the cost of debt is 11.00%, the cost of preferred stock is 12.00%, the cost of common stock is 17.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 15.00%, what is the Internal Rate of Return (IRR) of the project, given the expected cash flows listed here? Use a financial calculator to determine your answer.
Category T0 T1 T2 T3
Investment -$3,000,000
Net Working Capital (NWC. -$350,000 $350,000
Operating Cash Flow $1,200,000 $1,200,000 $1,200,000
Salvage $50,000
Total Incremental Cash Flow -$3,350,000 $1,200,000 $1,200,000 $1,600,000
A. About 13.11%
B. About 12.02%
C. About 11.16%
D. About 8.94%
Question 14 of 40 2.5/ 2.5 Points
Which of the following would be classified as debt lenders for a firm?
A. preferred shareholders, banks, and nonbank lenders
B. nonbank lenders, common shareholders, and commercial banks
C. preferred shareholders, common shareholders, and suppliers
D. suppliers, nonbank lenders, and commercial banks
Question 15 of 40 2.5/ 2.5 Points
The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equal $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm’s Weighted Average Cost of Capital (WACC) adjusted for taxes.
A. 10.11%
B. 10.00%
C. 9.09%
D. There is not enough information to answer this question.
Question 16 of 40 2.5/ 2.5 Points
The cost of debt could be which of the following?
A. the required return on money borrowed as a long-term loan from a bank
B. the required return on money borrowed from a venture capitalist
C. the yield-to-maturity on money raised by selling bonds
D. All of the choices above could be considered the cost of debt.
Question 17 of 40 0.0/ 2.5 Points
The following market information was gathered for the ACME corporation. The common stock is selling for $40.00 per share and there are 100,000 shares outstanding. Retained earnings equal $400,000, preferred stock has 1,000 shares outstanding, selling at $120.00 per share, and 500 outstanding long-term bonds selling for $1,035.00 each. For purposes of estimating the firm’s Weighted Average Cost of Capital (WACC) what are the market value weights of long-term debt, preferred stock, and equity?
A. D/V = 11.16%, PS/V = 2.59%, and E/V = 86.25%
B. D/V = 10.27%, PS/V = 2.38%, and E/V = 87.34%
C. D/V = 10.78%, PS/V = 3.08%, and E/V = 86.14%
D. D/V = 33.33%, PS/V = 33.33%, and E/V = 33.33%
Question 18 of 40 2.5/ 2.5 Points
Red Rider Bike Shop (RRBS) has an adjusted Weighted Average Cost of Capital (WACC) of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. RRBS is considering expanding by building a new shop in a distant city and considers the project to be riskier than the current operation. RRBS has an existing beta of 1.0, the required return on the market portfolio to be 11.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.30. Given this information, and assuming the cost of debt will not change if RRBS undertakes the new project, what adjusted WACC should be used in decision-making?
A. 8.56%
B. 9.84%
C. 10.00%
D. 11.24%
Question 19 of 40 2.5/ 2.5 Points
Use the security market line to determine the required rate of return for the following firm’s stock. The firm has a beta of 0.80, the required return in the market place is 12.50%, and the risk-free rate of return is 3.50%.
A. 13.50%
B. 10.70%
C. 7.20%
D. 2.80%
Question 20 of 40 2.5/ 2.5 Points
The formula for the Weighted Average Cost of Capital (WACC) adjusted is __________ .
A) the average of the cost of each financing component, weighted by the proportion of each component
B) the cost of capital for the firm as a whole
C) made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity
D) All of the above
Part 2 of 2 – Lesson 7 Questions 40.0/ 50.0 Points
Question 21 of 40 2.5/ 2.5 Points
When a company deals only in cash, the cash conversion cycle becomes _________ .
A. the collection cycle
B. the payable cycle
C. the production cycle
D. the collection cycle – the payable cycle
Question 22 of 40 2.5/ 2.5 Points
When using the ABC Inventory Management System, Type A items are__________ .
A. small-dollar items
B. nonessential inventory items
C. large-dollar or critical inventory items
D. moderate-dollar items
Question 23 of 40 2.5/ 2.5 Points
With energy costs greater than ever, Berwick’s Bike Shop is well-placed for an expansion. Its initial capital cost (not including working capital) is $750,000, expected after-tax operating cash flow is $225,000 per year for five years, and the recovery of capital assets after five years is $75,000. If this project has a required rate of return of 15% and the initial cost of working capital is $100,000, should Berwick expand the bike shop? (Assume that the $100,000 of working capital is recovered in Year five at the end of the project life) Compute a Net Present Value (NPV) to support your decision..
A. Yes, because the NPV = $8,759
B. No, because the NPV = -$850,000
C. No, because the NPV = -$8,759
D. Yes, because the NPV = $858,759
Question 24 of 40 0.0/ 2.5 Points
Of the following, which is NOT an accurate statement about the Economic Order Quantity (EOQ) model?
A. The actual cost of the inventory item is ignored.
B. Costs are divided into two categories: the cost of ordering and the cost of storage.
C. EOQ is an attempt to determine the appropriate level of inventory.
D. The EOQ assumes the sales rate fluctuates with seasonal changes.
Question 25 of 40 2.5/ 2.5 Points
Using the information provided, what is the collection cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 6.84 days
B. 7.60 days
C. 10.34 days
D. 12.41 days
Question 26 of 40 2.5/ 2.5 Points
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
Using the information provided, what is the accounts payable turnover for the firm?
A. 15 times
B. 60 times
C. 75 times
D. 90 times
Question 27 of 40 0.0/ 2.5 Points
In terms of the float, the buyer of a product wants to ________ and the seller wants to __________ .
A. increase the collection float; decrease the disbursement float
B. decrease the disbursement float; decrease the collection float
C. decrease the collection float; decrease the disbursement float
D. increase the disbursement float; decrease the collection float
Question 28 of 40 2.5/ 2.5 Points
BarnBurner Music, a music publishing firm located in Tennessee, bills its clients on the first of the month. For example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as follows: 50% at the end of the first month, 40% at the end of the second month, 8% at the end of the third month, and 2% default on their bills. The firm’s CEO wants to know the anticipated cash flow for April. Use the following information to estimate April cash flows.
First Quarter Actual Billings Second Quarter Anticipated Billings
January February March April May June
$88,000 $74,000 $96,000 $99,000 $82,000 $63,000
A. $96,000
B. $77,600
C. $84,640
D. $99,000
Question 29 of 40 2.5/ 2.5 Points
Lipscomb is set to establish a reorder policy for his remote snack bar located on Vacation Island. He sells 10 cases of soda per day and has a lead-time for delivery of one week. Occasionally, bad weather or mechanical difficulty can delay his delivery by up to three days. At what point should Lipscomb reorder (how many cases on hand) if he wants to also compensate for unexpected order delays?
A. 30 cases
B. 70 cases
C. 100 cases
D. There is not enough information to answer this question
Question 30 of 40 2.5/ 2.5 Points
Using the information provided, what is the inventory turnover for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 23.53 times
B. 53.33 times
C. 48.00 times
D. 60.00 times
Question 31 of 40 2.5/ 2.5 Points
Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the change in the profit margin if the firm moves from a cash-only policy to a credit policy?
A. $1,250,000
B. $8,000,000
C. $9,250,000
Question 32 of 40 2.5/ 2.5 Points
Using the information provided, what is the accounts payable cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 4.06 days
B. 4.87 days
C. 6.08 days
D. 24.33 days
Question 33 of 40 2.5/ 2.5 Points
Using the information provided, what is the length of the production cycle for the firm?
Perfect Purchase Electronics
Selected Income Statement Items, 2009
Cash Sales $1,500,000
Credit Sales $7,500,000
Total Sales $9,000,000
COGS $6,000,000
Perfect Purchase Electronics
Selected Balance Sheet Accounts
12/31/2009 12/31/2008 Change
Accounts Receivable $270,000 $240,000 $30,000
Inventory $125,000 $100,000 $25,000
Accounts Payable $110,000 $90,000 $20,000
A. 6.08 days
B. 7.60 days
C. 53.33 days
D. 6.84 days
Question 34 of 40 2.5/ 2.5 Points
Which of the following is NOT true of the cash conversion cycle?
A. It is the net period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.
B. Cash Conversion Cycle = Production Cycle + Collection Cycle – Payment Cycle
C. Cash Conversion Cycle = Production Cycle + Collection Cycle + Payment Cycle
D. The cash conversion cycle essentially measures how quickly a company can convert its products or services into cash.
Question 35 of 40 2.5/ 2.5 Points
The __________ is the period from the start of cash outflow for producing a product or service until the associated cash inflow materializes from the sale of that product or service.
A. cash conversion cycle
B. accounts receivable cycle
C. current ratio
D. business operating cycle
Question 36 of 40 0.0/ 2.5 Points
The __________ starts at the time production begins and ends with the collection of cash from the sale of the product.
A. accounts receivable cycle
B. business operating cycle
C. cash conversion cycle
D. production cycle
Question 37 of 40 2.5/ 2.5 Points
Ready Tees, an on line retailer of t-shirts, orders 100,000 t-shirts per year from its manufacturer. Ready Tees plans on ordering t-shirts 12 times over the next year. Ready Tees receives the same number of t-shirts each time it orders. The carrying cost is $0.10 per shirt per year. The order cost is $500 per order. What is the annual ordering cost of the t-shirt inventory (rounded to the nearest dollar)?
A. $5,000
B. $6,000
C. $10,000
D. $12,000
Question 38 of 40 0.0/ 2.5 Points
Travel and Tow Trailers Inc. makes small trailers for light-duty towing behind SUVs and small pickup trucks. Its trailers typically sell for $2,500. Many of its customers have asked for credit terms to aid in purchasing the trailers. The firm’s finance department has estimated the following profile for its light-duty trailers and customer base:
Annual sales: 10,000 trailers
Annual production costs per trailer: $1,500
Lost sales if credit is not provided for customers: 2,000 trailers
Default rate if all customers purchase on credit: 3.00%
What is the profit if the firm has a credit policy?
A. $25,000,000
B. $9,250,000
C. $450,000
D. $8,000,000
Question 39 of 40 2.5/ 2.5 Points
A __________ inventory item is an item that is not used in current operations but is serving a back-up role in case the current item fails during operation.
A. type C
B. redundant
C. reticent
D. beta generation
Question 40 of 40 2.5/ 2.5 Points
Extending credit to a customer has three major components: ____________ .
A. a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy for collecting overdue bills
B. a policy on how customers will qualify for credit, a policy on paying commissions on sales, and a policy for collecting overdue bills
C. a policy on how customers will qualify for credit, a policy on the payment plan allowed creditors, and a policy on accounting for depreciation
D. a policy on how customers will qualify for credit, a policy on accounting for depreciation, and a policy on paying commissions on sales
