Posted: October 20th, 2022

finance homework mcq with detail solutions

(21.7) Aging Schedule Answer:
b Diff: M
.doc#_edn1″ title=””>[i]. Short Construction offers
its customer’s credit terms of 2/10, net 30 days, while Fryman Construction
offers its customer’s credit terms of 2/10, net 45 days. The aging schedules for each of the two
companies’ accounts receivable are reported below:

Short Construction Fryman Construction
Age of Value
of Percentage of Value of Percentage of
Account
(Days)
Account Total Value Account Total Value
0-10 $58,800 60% $ 73,500 50%
11-30
19,600 20 29,400 20
31-45
14,700 15 29,400 20
46-60
2,940 3 10,290 7
Over 60 1,960 2 4,410 3
Total Receivables
$98,000 $147,000

Which company has the greatest percentage of overdue
accounts and what is their percentage of overdue accounts?

a. Fryman; 50% overdue.
b. Short; 20% overdue.
c. Fryman; 30% overdue.
d. Fryman; 3% overdue.
e. Short; 40% overdue.

 .doc#_edn2″ title=”” style=”font-size: 11px;”>[ii]. 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

(21.8)
EAR cost of trade credit Answer:
e Diff: M
.doc#_edn3″ title=””>[iii]. 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%

 .doc#_edn4″ title=”” style=”font-size: 11px;”>[iv]. 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%

 .doc#_edn5″ title=”” style=”font-size: 11px;”>[v]. 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%

 .doc#_edn6″ title=”” style=”font-size: 11px; font-weight: normal;”>[vi]. Phranklin
Pharms Inc. purchases merchandise from a company that gives sales terms of
2/15, net 40 days. Phranklin Pharms has
gross purchases of $819,388 per year.
What is the maximum amount of
costly trade credit Phranklin could get, assuming it abides by the supplier’s
credit terms? (Assume a 365-day year.)

a. $88,000
b. $33,000
c. $55,000
d. $50,000
e. $44,000

 .doc#_edn7″ title=”” style=”font-size: 11px;”>[vii]. C+
Notes’ business is booming, and it needs to raise more capital. The company purchases supplies from a single
supplier on terms of 1/10, net 20 days, and it currently takes the
discount. One way of getting the needed
funds would be to forgo the discount, and C+’s owner believes she could delay
payment to 40 days without adverse effects.
What is the effective annual rate
of stretching the accounts payable?

a. 10.00%
b. 11.11%
c. 11.75%
d. 12.29%
e. 13.01%

 .doc#_edn8″ title=”” style=”font-size: 11px; font-weight: normal;”>[viii]. Allen Brothers is interested
in increasing its free cash flow (which it hopes will result in a higher EVA
and stock price). The company’s goal is
to generate $180 million of free cash flow over the upcoming year. Allen’s CFO
has made the following project ( help with nursing paper writing from experts with MSN & DNP degrees)ions for the upcoming year:

·
EBIT
is project ( help with nursing paper writing from experts with MSN & DNP degrees)ed to be $850 million.
·
Gross
capital expenditures are expected to total $360 million, and its depreciation
expense is expected to be $120 million.
Thus, its net capital expenditures are expected to total $240 million.
·
The
firm’s tax rate is 40 percent.

The company forecasts that there will be no change in
its cash and marketable securities, nor will there be any changes in notes
payable or accruals. Which of the
following will enable the company to achieve its goal of generating $180
million in free cash flow?

b. Accounts receivable increase $470 million,
inventory increases $230 million, and accounts payable increase $790 million.
c. Accounts receivable increase $470 million,
inventory increases $230 million, and accounts payable increase $610 million.
d. Accounts receivable decrease by $500
million, inventory increases by $480 million, and accounts payable decline by
$80 million.
e. Accounts receivable decrease by $400
million, inventory increases by $480 million, and accounts payable increase by
$80 million.
f. Accounts receivable increase by $500
million, inventory increases by $100 million, and accounts payable decline by
$480 million.

Tough:

 .doc#_edn9″ title=”” style=”font-size: 11px;”>[ix]. Jordan Air Inc. has average inventory of
$1,000,000. Its estimated annual sales
are $10 million and the firm estimates its receivables conversion period to be
twice as long as its inventory conversion period. The firm pays its trade
credit on time; its terms are net 30 days.
The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average
inventory to $863,000. Assume a 365-day
year and that sales will not change. By
how much must the firm also reduce its accounts receivable to meet its goal of
a 10-day reduction in its cash conversion cycle?

a. $ 101,900
b. $1,000,000
c. $ 136,986
d. $ 333,520
e. $ 0

 .doc#_edn10″ title=”” style=”font-size: 11px;”>[x]. 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

(21.8) Financial statements and
trade credit Answer: d Diff: T
.doc#_edn11″ title=””>[xi]. 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

Multiple Part:

(The
following information applies to the next three problems.)

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.

 .doc#_edn12″ title=”” style=”font-size: 11px;”>[xii]. 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

 .doc#_edn13″ title=”” style=”font-size: 11px;”>[xiii]. What is the difference in the
project ( help with nursing paper writing from experts with MSN & DNP degrees)ed ROEs between the restricted and relaxed policies?

a. 2.24%
b. 1.50%
c. 1.00%
d. 0.50%
e. 0.33%

 .doc#_edn14″ title=”” style=”font-size: 11px;”>[xiv]. Assume now the company
expects that if it adopts a restricted policy, its sales will fall by 15
percent, EBIT will fall by 10 percent, but its total assets turnover, debt
ratio, interest rate, and tax rate will remain the same. In this situation, what is the difference in
the project ( help with nursing paper writing from experts with MSN & DNP degrees)ed ROEs between the restricted and relaxed policies?

a. 2.24%
b. 1.50%
c. 1.00%
d. 0.50%
e. 0.33%

Financial Calculator Section

Multiple
Choice: Problems

Medium:

 .doc#_edn15″ title=”” style=”font-size: 11px;”>[xv]. Wicker
Corporation is determining whether to support $100,000 of its permanent working
capital with a bank note or a short-term bond.
The firm’s bank offers a two-year note for which the firm will receive
$100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at
market rates. Alternatively, Wicker can
sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000 par
value at a price of $973.97. How many
percentage points lower is the interest rate on the less expensive debt instrument?

a. 0.0%
b. 1.2%
c. 1.0%
d. 1.8%
e. 0.6%

Tough:

 .doc#_edn16″ title=”” style=”font-size: 11px;”>[xvi]. Leiner
Corp. is a retailer that finances its purchases with trade credit under the
following terms: 1/10, net 30 days. The
company plans to take advantage of the free trade credit that is offered. After all the free trade credit is used, the
company can either finance the clothing purchases with a bank loan that has an
effective rate of 10.1349 percent (on a 365-day year), or the firm can continue
to use trade credit.

The company has an understanding
with its suppliers that within moderation, it is all right to “stretch out” its
payments beyond 30 days without facing any additional financing costs. Therefore, the longer it takes the company to
pay its suppliers, the lower the cost of trade credit. How many days would the firm wait to pay its
suppliers in order for the cost of the trade credit to equal the cost of the
bank loan?

a. 30
days
b. 36
days
c. 40
days
d. 46
days
e. 48
days

.doc#_ednref1″ title=””>[

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