ADM 2350 : Finance4.docx
Document Summary
Get access
Related Documents
Related Questions
QUESTION 1
Flexibility of the source of financing. ____ tends to require fewer specific asset restrictions, while _____ tends to require fewer enterprise restrictions.
| a. | Leases; loans | |
| b. | Leases, leases | |
| c. | Loans; loans | |
| d. | Loans, leases |
QUESTION 2
_____ is not really buying on credit, whereas _____ is generally free financing for a specified period of time.
| a. | Cash on delivery, cash in advance. | |
| b. | Cash in advance; net 30 | |
| c. | Net 30, cash in advance | |
| d. | Net 30; 1/15 net 40 |
QUESTION 3
_____ is often used by manufacturers to significantly lower their production cost. It gives them the ability to produce in a level production mode year round, rather than running two or three shifts at the peak of their demand cycle.
| a. | Consignment | |
| b. | Net cash, bill to bill | |
| c. | Seasonal dating | |
| d. | Cash in advance |
QUESTION 4
A firm is offered credit terms of 1.5/10, net 40. What would be the cost to this firm of using its vendor as its banker?
| a. | 18.53% | |
| b. | 18.25% | |
| c. | 13.90% | |
| d. | 17.63% |
QUESTION 5
A company estimates its cost of vendor financing (using its vendor as its banker) is 12.2%. It also estimates its effective cost of bank financing to be 9.1%. Which statement best describes this situation?
| a. | Can't say for sure what the better funding source would be. | |
| b. | The vendor offers less expensive financing and should be used instead of the bank for that reason. | |
| c. | The company should use its vendor as its financing source, not its bank. | |
| d. | The company should borrow from its bank and take advantage of the trade discount being offered. |
QUESTION 6
A company is offered purchase terms of 2/10, net 40. If it can borrow from its bank for 8%, how long would it need to wait to pay its supplier to bring the cost of vendor financing down to 8%, making it a matter of indifference which financing source was used. I.e., instead of paying in 40 days, when would it pay to reduce the cost of vendor financing to 8%, assuming the vendor would permit it?
| a. | 83 days | |
| b. | 93 days | |
| c. | 103 days | |
| d. | 113 days |
QUESTION 7
What is the effective cost of bank financing if the loan amount is $100,000, interest is discounted (advance), a 1% commitment fee is paid up front, and a 9% compensating balance is required? The stated interest rate is 8%.
| a. | 8.00% | |
| b. | 8.98% | |
| c. | 10.98% | |
| d. | 9.98% |
QUESTION 8
Floor planning is best described as:
| a. | Consignment with interest | |
| b. | Seasonal dating | |
| c. | Consignment | |
| d. | Receivables financing |
QUESTION 9
Coverage ratios as covenants are calculated using values from the _________. Current ratios as covenants are calculated using values from the ______.
| a. | Income statement and balance sheet; balance sheet | |
| b. | Income statement; balance sheet | |
| c. | Balance sheet; balance sheet | |
| d. | Income statement; income statement and balance sheet |
QUESTION 10
_____________ as a source of short-term financing, is described as spontaneous financing.
| a. | Long-term debt | |
| b. | Commercial paper | |
| c. | Bank loans | |
| d. | Trade credit |
| The 2015 financial statements for Growth Industries are presented below: |
| INCOME STATEMENT, 2015 | |||
| Sales | $ | 370,000 | |
| Costs | 235,000 | ||
| EBIT | $ | 135,000 | |
| Interest expense | 27,000 | ||
| Taxable income | $ | 108,000 | |
| Taxes (at 35%) | 37,800 | ||
| Net income | $ | 70,200 | |
| Dividends | $ 42,120 | ||
| Addition to retained earnings | 28,080 | ||
| BALANCE SHEET, YEAR-END, 2015 | |||||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $ | 6,000 | Accounts payable | $ | 13,000 |
| Accounts receivable | 11,000 | Total current liabilities | $ | 13,000 | |
| Inventories | 33,000 | Long-term debt | 270,000 | ||
| Total current assets | $ | 50,000 | Stockholdersâ equity | ||
| Net plant and equipment | 310,000 | Common stock plus additional paid-in capital | 15,000 | ||
| Retained earnings | 62,000 | ||||
| Total assets | $ | 360,000 | Total liabilities and stockholdersâ equity | $ | 360,000 |
| Sales and costs in 2016 are projected to be 20% higher than in 2015. Both current assets and accounts payable are projected to rise in proportion to sales. The fixed assets of Growth Industries are operating at only 75% of capacity. Interest expense in 2016 will equal 10% of long-term debt outstanding at the start of the year. The firm will maintain a dividend payout ratio of .60. |
| What is the required external financing over the next year? |
| Even if sales increase by 20%, the firm still has more than enough fixed assets to meet production. Only working capital will increase. Net working capital of the firm in 2015 was $. The increase in net working capital will be $, which is less than the increase in the retained earnings. Thus required external financing is $. A negative external financing value indicates the firm will generate more cash than it needs to finance the projected growth. This extra cash can be used to reduce debt, repurchase shares, increase cash reserves, or fund future growth. This extra cash was primarily due to the firm's excess production capacity. |