Fin/ 571 quiz 3

1- The operating cycle

a-      Ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

b-      Begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures.

c-       Begin when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

d-      To measure operating cycle we need another measure called the days’ payables outstanding.

2- You are provided the following working capital information for the Ridge Company:

Operating cycle: What is the operating cycle for Ridge Company?

a-      47 days

b-      36 days

c-       85 days

d-      51 days

3- Tick tock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $ 85 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order size.

a-      161 clocks

b-      26,154 clocks

c-       15,294 clocks

d-      124 clocks

4- The assets substitution problem occurs when

a-      Managers substitute riskier assets for less risky ones to the detriment of bondholders.

b-      Managers substitute less risky assets for riskier ones to the detriment of bondholders.

c-       Managers substitute riskier assets for less risky ones to the detriment of equity holders.

d-      Managers substitute less risky assets for riskier ones to detriment of equity holders.

5- M & M Proposition 1: Dynamo Corp. produces annual cash flower of $ 150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

How much are your cash flows today?

a-      $ 150

b-      $ 12.38

c-       $ 15

d-      $ 4.50

6- M & M Proposition 2: Melba’s Toast has a capital structure with 30 % debt and 70 % equity. Its pretax cost of debt is 6 %, and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is appropriate WACC?

a-      8.80%

b-      7.44%

c-       6.35%

d-      8.17%

7- According to the text, the financial plan covers a period of

a-      None of these

b-      Three to five years

c-       Ten years

d-      One year

8- The financing plan of a firm will indicate

a-      The firm’s dividend policy, the desired capital structure for the firm, and the firm’s working capital policy.

b-      The dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s dividend policy.

c-       The dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s working capital policy.

d-      The dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm’s dividend policy, and the firm’s working capital policy.

9- Payout and retention ratio: Tradewinds Corp. has revenues of $ 9,651,220, costs of $ 6,080,412, interest payment of $ 511, 233, and a tax rate of 34 percent. It paid dividends of $ 1,384,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

a-      69%, 31%

b-      25%, 75%

c-       34%, 66 %

d-      66%, 34%