FINM Flashcards by Samantha Crum

Which one of the following responses is not an advantage to a corporation that uses the commercial paper market for short-term financing?

a. This market provides more funds at lower rates than other methods provide.
b. This market provides a broad distribution for borrowing.
c. There are no restrictions as to the type of corporation that can enter into this market.
d. The borrower avoids the expense of maintaining a compensating balance with a commercial bank.

There are no restrictions as to the type of corporation that can enter into this market.

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Which of the following ratios is appropriate for the evaluation of accounts receivable’

a. Days’ sales outstanding.
b. Return on total assets.
c. Collection to debt ratio.
d. Current ratio.

Days’ sales outstanding.

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A manufacturing company is attempting to implement a just-in-time (JIT) purchase policy system by negotiating with its primary suppliers to accept long-term purchase orders which result in more frequent deliveries of smaller quantities of raw materials. If the JIT purchase policy is successful in reducing the total inventory
costs of the manufacturing company, which of the following combinations of cost changes would be most likely to occur?
a. Purchasing costs increase, Stockout costs decrease
b. Purchasing costs increase Quality costs decrease
c. Quality costs increase Ordering costs decrease
d. Stockout cost increase Carrying costs decrease

Stockout cost increase Carrying costs decrease

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At the end of September a company has outstanding accounts receivable of $350 on third-quarter credit sales, composed as follows:
Still outstanding at the
Month Credit sales end of September
July $600 $100
August 900 170
September 500 80
The percentage of receivables in the 31-to-60-day age group at the end of September is

48.57%

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The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

a. High marginal tax rates and many noninterest tax benefits.
b. High marginal tax rates and few noninterest tax benefits.
c. Low marginal tax rates and few noninterest tax benefits.
d. Low marginal tax rates and many noninterest tax

High marginal tax rates and few noninterest tax benefits.

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Which of the following assumptions is associated with the economic order quantity formula?

a. The cost of placing an order will vary with quantity ordered.
b. The carrying cost per unit will vary with quantity ordered.
c. Periodic demand is known.
d. The purchase cost per unit will vary based on quantity discounts.

Periodic demand is known.

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Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet Bander’s financing requirements?

a. Short-term debt.
b. Bonds.
c. Long-term debt.
d. Common stock.

Common stock.

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The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm’s net
cost of debt?

9.8%

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A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers.
Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the
company at any point in time, assuming a 365-day year?

$45,205.48

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A company has $650,000 of 10% debt outstanding and $500,000 of equity financing. The required return of the equity holders is 15% and there are no retained earnings currently available for investment purposes. If new outside equity is raised, it will cost the firm 16%. New debt would have before-tax cost of 9%, and the corporate tax rate is 50%. When calculating the marginal cost of capital, the company should assign a cost of to equity capital and to the after-tax cost of debt financing.
List A List B
a. 15% 4.5%
b. 15% 5.0%
c. 16% 4.5%
d. 16% 5.0%

16% 4.5%

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Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of AmicabIes customers take the 2% discount and pay on day 10. The remainder of Amicable’s customers pay on day 30. How many days’ sales are in Amicable’s accounts receivable?

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How would the following be used in the economic order quantity formula?
Inventory carrying cost Cost per purchase order

Denominator Numerator

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Blue Co. sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory for one year is $8, and the purchase order cost per order is $32.
What is the economic order quantity?

400

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The best reason corporations issue Eurobonds rather than domestic bonds is that

These bonds are normally a less expensive form of financing because of the absence of government regulation.

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Which of the following is accurate regarding a company with a high degree of financial leverage and significant losses for the period?

a. Common stockholders are better off than they would have been if the firm was not as heavily leveraged.
b. It is impossible to determine the effect without knowing the operating leverage.
c. Common stockholders are worse off than they would have been if the firm was not as heavily leveraged.
d. The extent of financial leverage is not relevant to the well-being of common stockholders.

Common stockholders are worse off than they would have been if the firm was not as heavily leveraged.

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All of the following are features of just-in-time (JIT) systems except

a. Simplification of production activities by eliminating non-value-added activities.
b. Reduction of inventories, ideally to zero.
c. Sharing of sales forecasts with vendors.
d. Immediate incoming inspection of materials to eliminate defective parts.

Immediate incoming inspection of materials to eliminate defective parts.

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Which of the following types of bonds is most likely to maintain a constant market value?

a. Floating-rate.
b. Convertible.
c. Callable.
d. Zero-coupon.

Floating-rate.

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Why would a firm generally choose to finance temporary assets with short-term debt?

Matching the maturities of assets and liabilities reduces risk.

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A company with a combined federal and state tax rate of 30% has the following capital structure:
Weight Instrument Cost of capital
40% Bonds 10%
50% Common stock 10%
10% Preferred stock 20%
What is the weighted-average after-tax cost of capital for this company?

9.8%

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DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination ofdebt and equity to finance the investment:
- Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-
flotation cost yield is 8.08%.
- Use $35,000,000 of funds generated from earnings.
- The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.
Assume that the after-tax cost of debt is 7% and the cost of equity ïs 12%. Determine the weighted-average cost of capital.

10.50%

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A growing company is assessing current working capital requirements. An average of 58 days is required to convert raw materials into finished goods and to sell
them. Then an average of 32 days is required to collect on receivables. If the average time the company takes to pay for its raw materials is 15 days after they are
received, then the total cash conversion cycle for this company would be

75 days.

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As a consequence of finding a more dependable supplier, Fee Co. reduced its safety stock of raw materials by 60%. What is the effect of this safety stock reduction on Fee’s economic order quantity?

No effect.

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ABC Co. had debt with a market value of $1 million and an after-tax cost of financing of 8%. ABC also had equity with a market value of $2 million and a cost of equity capital of 9%. ABC’s weighted-average cost of capital would be

8.7%

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Which of the following is the most expensive form of additional capital?

a. New debt.
b. New preferred stock.
c. Retained earnings.
d. New common stock.

New common stock.

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Which of the following statements is correct regarding the weighted-average cost of capital (WACC)? a. A company with a high WACC is attractive to potential shareholders. b. An increase in the WACC increases the value of the company. c. One of a company’s objectives is to minimize the WACC. d. WACC is always equal to the company’s borrowing rate.

One of a company’s objectives is to minimize the WACC.

If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using a 360-day year) of forgoing the cash discount and making payment on the 40th day is

24.49%

Capital and operating leases differ in that the lessor

Finances the transaction through the leased asset only under a capital lease.

Which of the following statements is correct regarding the declaration of a stock dividend by a corporation having only one class of par value stock? a. A stock dividend increases a stockholder’s proportionate share of corporate ownership. b. A stock dividend has the same legal and practical significance as a stock split. c. A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders. d. A stock dividend causes a decrease in the assets of the corporation.

A stock dividend is a corporation’s ratable distribution of additional shares of stock to its stockholders.

DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the investment: - Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after-flotation cost yield is 8.08%. - Use $3 5,000(000 of funds generated from earnings. - The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. The before-tax cost of DQZ’s planned debt financing, net of flotation costs, in the first year is

8.08%

A company has an outstanding one-year bank loan of $500,000 at a stated interest rate of 8%. The company is required to maintain a 20% compensating balance in its checking account. The company would maintain a zero balance in this account if the requirement did not exist. What is the effective interest rate of the loan?

10%

Larson Corp. issued $20 million of long-term debt in the current year. What is a major advantage to Larson with the debt issuance?

The relatively low after-tax cost due to the interest deduction.

Which one of the following factors might cause a firm to increase the debt in its financial structure? a. Increased economic uncertainty. b. An increase in the price-earnings ratio. c. An increase in the corporate income tax rate. d. An increase in the federal funds rate.

An increase in the corporate income tax rate.

Assume that a firm has a 40% tax rate and the following capital structure: Amount Cost before tax Debt $10,000,000 6% Preferred equity 5,000,000 6% Common equity 25,000,000 10% $40,000,000 What is the firm’s weighted-average cost of capital?

7.9%

When calculating the cost of capital, the cost assigned to retained earnings should be

Lower than the cost of external common equity.

Kemple is a newly established janitorial firm, and the owner is deciding what type of checking account to open. Kemple is planning to keep a $500 minimum balance in the account for emergencies and plans to write roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. Kemple also has the option of a premium business checking account that requires a $2,500 minimum balance but has no monthly fees or per check charges. If Kemple’s cost of funds is 10%, which account should Kemple choose?

Premium account, because the savings is $16 per year.

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

To reduce the interest rate on the bonds being sold.

The credit instrument known as a banker’s acceptance

Is a time draft payable on a specified date and guaranteed by the bank.

The optimal capitalization for an organization usually can be determined by the

Lowest total weighted-average cost of capital (WACC).

A company sells 10,000 skateboards a year at $66 each. All sales are on credit, with terms of 3/10, net 30, which means 3% discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers. What is the expected average collection period for the company?

20 days.

Spotech Co.’s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively. Short-term interest rates are expected to average 5%. If Spotech could increase inventory turnover from its current 8.0 times per year to 10.0 times per year, its expected cost savings in the current year would be

$ 165,625

A bond backed by fixed assets is a(n)

Mortgage bond.

Net working capital is the difference between

Current assets and current liabilities.

The degree of operating leverage (DOL) is

A measure of the change in operating income resulting from a given change in sales.

A compensating balance

Compensates a financial institution for services rendered by providing it with deposits of funds.

The target capital structure of Traggle Co. is 50% debt, 10% preferred equity, and 40% common equity. The interest rate on debt is 6%, the yield on the preferred is 7%, the cost of common equity is 11.5%, and the tax rate is 40%. Traggle does not anticipate issuing any new stock. What is Traggle’s weighted-average cost of capital?

7.10%

A firm sells on terms of 2/10 net 60. It sells 1,000 units per day at a unit price of $10. On 60% of sales, customers take the cash discount. On the remaining 40% of sales, customers pay, on average, in 70 days. What would be the impact on the balance of accounts receivable if the firm initiates a more aggressive collection policy and is able to reduce the average payment period to 60 days for those customers not taking the cash discount? (Assume sales levels are unaffected by the change in policy.)

Decrease by $40,000.

Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell’s inventory turnover and inventory holding costs?

Inventory turnover - Increase | Inventory holding costs - Decrease

What is the major advantage of a zero-balance account system?

It maximizes the float involved in cash disbursements.

Financing some current assets with long-term debt is considered to be

A conservative financing policy.

Bonds payable issued with scheduled maturities at various dates are called

Serial bonds

Which of the following represents a firm’s average gross receivables balance? I. Days’ sales in receivables x Accounts receivable turnover. II. Average daily sales x Average collection period III. Net sales + Average gross receivables

Average daily sales x Average collection period

Serial bonds are attractive to investors because

Investors can choose the maturity that suits their financial needs.

Which of the following inventory management approaches orders at the point where carrying costs equate nearest to restocking costs in order to minimize total inventory cost? a. Materials requirements planning. b. ABC. c. Just-in-time. d. Economic order quantity.

Economic order quantity.

The average collection period for a firm measures the number of days

After a typical credit sale is made until the firm receives the payment.

Which of the following is critical to effective supply chain management? a. Sharing of information. b. A large number of suppliers. c. A large number of customers. d. A complex production process.

Sharing of information.

When managing cash and short-term investments, a corporate treasurer is primarily concerned with

Liquidity and safety.

In which stage of a firm’s development is it most likely to seek and obtain external equity financing in the form of venture capital?

Rapid growth.

A firm must select from among several methods of financing arrangements when meeting its capital requirements. To acquire additional growth capital while attempting to maximize earnings per share, a firm should normally

Select debt over equity initially, even though increased debt is accompanied by interest costs and a degree of risk.

Which one of the following statements correctly compares bond financing alternatives? a. A call provision is usually considered detrimental to the investor. b. A sinking fund prohibits the firm from redeeming a bond issue prior to its final maturity c. A convertible bond must be converted to common stock prior to its maturity. d. A bond with a call provision typically has a lower yield to maturity than a similar bond without a call provision.

A call provision is usually considered detrimental to the investor.

Assume a company has gone bankrupt and will be liquidated. After liquidating the assets and covering tax liabilities, administration fees, and wage expenses, the following claims remain: Notes payable $10,000,000 Unsecured bank loans 4,000,000 Subordinated debentures 6,000,000 There is only $10,000,000 available to pay these claims. How much will be allocated to subordinated debentures?

In computing the reorder point for an item of inventory, which of the following is used? I. Cost II. Usage per day III. Lead time

II. Usage per day | III. Lead time

A firm’s target or optimal capital structure is consistent with which one of the following? a. Minimum cost of equity. b. Maximum earnings per share. c. Minimum cost of debt. d. Minimum weighted-average cost of capital.

Minimum weighted-average cost of capital.

A company currently has 1,000 shares of common stock outstanding with zero debt. It has the choice of raising an additional $100,000 by issuing 9% long-term debt, or issuing 500 shares of common stock. The company has a 40% tax rate. What level of earnings before interest and taxes (EBIT) would result in the same earnings per share (EPS) for the two financing options?

An EBIT of $27,000 would result in EPS of $10.80 for both.

The cash conversion is accurately illustrated by which of the following expressions? a. Inventory + Receivables — Payables conversion conversion deferral period period period b. Inventory — Receivables — Payables conversion conversion deferral period period period c. Inventory + Receivables + Payables conversion conversion deferral period period period d. Inventory — Receivables — Payables conversion conversion deferral period period period

Inventory + Receivables — Payables conversion conversion deferral period period period

The economic order quantity formula assumes that

Periodic demand for the good is known.

An increase in which of the following should cause management to reduce the average inventory? a. The cost of placing an order. b. The lead time needed to acquire inventory. c. The cost of carrying inventory. d. The annual demand for the product.

The cost of carrying inventory.

The purchase of treasury stock with a firm’s surplus cash

Increases a firm’s financial leverage.

By using the dividend growth model, estimate the cost of equity capital for a firm with a stock price of $30, an estimated dividend at the end of the first year of $3 per share, and an expected growth rate of 10%

20.0%

The Polly Company wishes to determine the amount of safety stock that it should maintain for Product D that will result in the lowest cost. The following information is available: Stockout cost $80 per occurrence Carrying cost of safety stock $2 per unit Number of purchase orders 5 per year The available options open to Polly are as follows: Probability of running Units of safety stock out of safety stock safety 10 50% 20 40% 30 30% 40 20% 50 10% 55 5% The number of units of safety stock that will result in the lowest cost is

Zero-coupon bonds

Increase in value each year as they approach maturity, providing the owner with the total payoff at maturity.

If a firm increases its cash balance by issuing additional shares of common stock, working capital

Increases and the current ratio increases.

A company has $1,500,000 of outstanding debt and $1,000,000 of outstanding common equity. Management plans to maintain the same proportions of financing from each source if additional projects are undertaken. If the company expects to have $60,000 of retained earnings available for reinvestment in new projects in the coming year, what dollar amount of new investments can be undertaken without issuing new equity?

$150,000

In comparison to the capital asset pricing model, the arbitrage pricing model

Involves a more precise measurement of systematic risk.

Preferred and common stock differ in that

Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of bankruptcy.

If two companies, company X and company Y, are alike in all respects except that company X employs more debt financing and less equity financing than company Y does, which of the following statements is true? a. Company X has less financial leverage than company Y. b. Company X has less operating earnings variability than company Y. c. Company X has more net earnings variability than company Y. d. Company X has more operating earnings variability than company Y.

Company X has more net earnings variability than company Y.

Which of the following effects would a Iockbox most likely provide for receivables management? a. Minimized collection float. b. Minimized disbursement float. c. Maximized collection float. d. Maximized disbursement float.

Minimized collection float.

A company has the following financial information: Proportion of Cost of Source of capital capital structure capital Long-term debt 60% 7.1% Preferred stock 20% 10.5% Common stock 20% 14.2% Proportion of capital structure To maximize shareholder wealth, the company should accept projects wit

9.3%

Assume that nominal interest rates just increased substantially but that the expected future dividends for a company over the long run were not affected. As a result of the increase in nominal interest rates, the company’s stock price should

Decrease.

A company sells 1,500 units of a particular item each year and orders the items in equal quantities of 500 units at a price of $5 per unit. No safety stocks are held. If the company has a cost of capital of 12%, its annual cost of carrying inventory is

$150

A firm has daily cash receipts of $100,000 and collection time of 4 days. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of $500. If money market rates are expected to average 6% during the year, the net annual benefit (loss) from having this service is

$ 6,000

In practice, dividends

Usually exhibit greater stability than earnings.

The market value of a firm’s outstanding common shares will be higher, everything else equal, if

Investors have a lower required return on equity.

Newman Products has received proposals from several banks to establish a lockbox system to speed up receipts. Newman receives an average of 700 checks per day averaging $1,800 each, and its cost of short-term funds is 7% per year. Assuming that all proposals will produce equivalent processing results and using a 360- day year, which one of the following proposals is optimal for Newman? a. A compensating balance of $1,750,000. b. A fee of 0.03% of the amount collected. c. A flat fee of $125,000 per year. d. A $0.50 fee per check. . ..

A compensating balance of $1,750,000.

Which of the following types of dividends do not reduce the shareholders’ equity in the corporation? a. Liquidating dividends. b. Stock dividends. c. Property dividends. d. Cash dividends.

Stock dividends.

The theory underlying the cost of capital is primarily concerned with the cost of

Long-term funds and new funds.

DQZ Telecom is considering a project for the coming year that will cost $50,000,000. DQZ plans to use the following combination of debt and equity to finance the investment: - Issue $15,000,000 of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 1.5% of par. The after- flotation cost yield is 8.08%. - Use $35,000,000 of funds generated from earnings. - The equity market is expected to earn 12%. US Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return, which is adjusted by the company’s beta. Compute DQZ’s expected rate of return on equity.

9.20%