How do I solve the Mirr, discounted payback method, after tax salvage, dividend payout ratio, and cash receipts

I have the answers I just need to know how to solve these questions the easiest way and also if I can put in my ba11 plus calculator please tell me how...thank you Questions # 9, 20, 26, 28, 34, 36 and 40

Sample Exam Questions - Chapters 11 - 15 1. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC. b. The lower the WACC used to calculate it, the lower the calculated NPV will be. c. If a project's NPV is less than zero, then its IRR must be less than the WACC. d. If a project's NPV is greater than zero, then its IRR must be less than zero. e. The NPV of a relatively low-risk project should be found using a relatively high WACC. 2. Which of the following statements is CORRECT? a. One defect of the IRR method versus the NPV is that the IRR does not take account of cash flows over a project's full life. b. One defect of the IRR method versus the NPV is that the IRR does not take account of the time value of money. c. One defect of the IRR method versus the NPV is that the IRR does not take account of the cost of capital. d. One defect of the IRR method versus the NPV is that the IRR values a dollar received today the same as a dollar that will not be received until some time in the future. e. One defect of the IRR method versus the NPV is that the IRR does not take proper account of differences in the sizes of projects. 3. Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The longer a project's payback period, the more desirable the project is normally considered to be by this criterion. b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money. c. If a project's payback is positive, then the project should be rejected because it must have a negative NPV. d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem. e. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects with relatively short lives and accept long-lived projects, and this will cause its risk to increase over time. 4. Which of the following statements is CORRECT? a. The internal rate of return method (IRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. b. The payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. c. The discounted payback method is generally regarded by academics as being the best single method for evaluating capital budgeting projects. d. The net present value method (NPV) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. e. The modified internal rate of return method (MIRR) is generally regarded by academics as being the best single method for evaluating capital budgeting projects. 1 5. The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1, 223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? a. $7,581,072 b. $2,092,432 c. $4,836,752 d. $3,112,459 6. Creighton, Inc., has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the firm's payback criteria? a. 4.13 years; no b. 4.13 years; yes c. 3.87 years; yes d. 3.87 years; no 7. Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? a. 5.4 years; no b. 6.1 years; no c. 4.6 years; yes d. 4.2 years; yes 8. Modern Federal Bank is setting up a brand new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Round to the nearest percent.) a. 20% b. 23% c. 25% d. 27% 9. Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the MIRR on this project? (Round to the nearest percent.) a. 36% b. 37% c. 38% d. 39% 2 10. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback? Year Cash flows a. b. c. d. e. 1.75 1.89 2.08 1.51 1.56 0 -$300 1 $150 2 $200 3 $300 years years years years years 11. Warnock Inc. is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC: 10.00% Year 0 1 2 3 Cash flows -$825 $500 $400 $300 a. b. c. d. e. $194.79 $153.98 $155.84 $181.81 $185.52 12. Simkins Renovations Inc. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year Cash flows a. b. c. d. e. 0 -$500 1 $300 2 $290 3 $280 4 $270 53.16% 46.46% 41.10% 54.06% 44.68% 13. Maxwell Feed & Seed is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year 0 Cash flows -$9,000 a. b. c. d. e. 1 $2,000 2 $2,025 3 $2,050 3.52% 3.34% 4.68% 4.46% 3.39% 3 4 $2,075 5 $2,100 14. Hindelang Inc. is considering a project that has the following cash flow and WACC data. What is the project's MIRR? Note that a project's projected MIRR can be less than the WACC (and even negative), in which case it will be rejected. WACC: 10.50% Year 0 Cash flows -$850 a. b. c. d. e. 1 $300 2 $320 3 $340 4 $360 16.80% 16.01% 15.85% 15.06% 12.05% 15. Masulis Inc. is considering a project that has the following cash flow and WACC data. What is the project's discounted payback? WACC: 10.00% Year 0 Cash flows -$700 a. b. c. d. e. 1.57 1.56 1.38 1.48 1.54 1 $525 2 $485 3 $445 4 $405 years years years years years 16. Suppose Tapley Inc. uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects. Which of the following independent projects should Tapley accept, assuming that the company uses the NPV method when choosing projects? a. Project A, which has average risk and an IRR = 9%. b. Project B, which has below-average risk and an IRR = 8.5%. c. Project C, which has above-average risk and an IRR = 11%. d. Without information about the projects' NPVs we cannot determine which one or ones should be accepted. e. All of these projects should be accepted as they will produce a positive NPV. 17. A company is considering a new project. The CFO plans to calculate the project's NPV by estimating the relevant cash flows for each year of the project's life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flows), then discounting those cash flows at the company's overall WACC. Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows? a. All sunk costs that have been incurred relating to the project. b. All interest expenses on debt used to help finance the project. c. The additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project's life. d. Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year. e. Effects of the project on other divisions of the firm, but only if those effects lower the project's own direct cash flows. 4 18. Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project? a. The new project is expected to reduce sales of one of the company's existing products by 5%. b. Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost. c. The company has spent and expensed $1 million on research and development costs associated with the new project. d. The company spent and expensed $10 million on a marketing study before its current analysis regarding whether to accept or reject the project. e. The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year. 19. Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects: Which set of projects would maximize shareholder wealth? Project Risk Expected Return A High 15% B Average 12% C High 11% D Low 9% E Low 6% a. b. c. d. e. A and B. A, B, and C. A, B, and D. A, B, C, and D. A, B, C, D, and E. 20. Marshall-Miller & Company is considering the purchase of a new machine for $50,000, installed. The machine has a tax life of 5 years, and it can be depreciated according to the depreciation rates below. The firm expects to operate the machine for 4 years and then to sell it for $6,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4? Year 1 2 3 4 5 6 a. b. c. d. e. Depreciation Rate 0.20 0.32 0.19 0.12 0.11 0.06 $8,395 $7,008 $5,767 $7,300 $8,979 5 21. Business risk is affected by a firm's operations. Which of the following is NOT directly associated with (or does not directly contribute to) business risk? a. Demand variability. b. Sales price variability. c. The extent to which operating costs are fixed. d. The extent to which interest rates on the firm's debt fluctuate. e. Input price variability. 22. Based on the information below, what is the firm's optimal capital structure? a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50. b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90. c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20. d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40. e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00. 23. Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.70 per unit produced, and its product sells for $3.90 per unit. What is the company's break-even point, i.e., at what unit sales volume would income equal costs? a. 391,667 b. 423,000 c. 466,083 d. 477,833 e. 446,500 24. You own 100 shares of Troll Brothers' stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split? a. You will have 200 shares of stock, and the stock will trade at or near $120 a share. b. You will have 200 shares of stock, and the stock will trade at or near $60 a share. c. You will have 100 shares of stock, and the stock will trade at or near $60 a share. d. You will have 50 shares of stock, and the stock will trade at or near $120 a share. e. You will have 50 shares of stock, and the stock will trade at or near $600 a share. 25. Your firm adheres strictly to the residual dividend model. All else equal, which of the following factors would be most likely to lead to an increase in the firm's dividend per share? a. The firm's net income increases. b. The company increases the percentage of equity in its target capital structure. c. The number of profitable potential projects increases. d. Congress lowers the tax rate on capital gains, leaving the rest of the tax code unchanged. e. Earnings are unchanged, but the firm issues new shares of common stock. 6 26. Portland Plastics Inc. has the following data. If it follows the residual dividend model, what is its forecasted dividend payout ratio? Capital budget % Debt Net income (NI) a. b. c. d. e. $11,000 40% $11,250 43.40% 36.37% 50.43% 41.33% 50.01% 27. Mid-State BankCorp recently declared a 7-for-2 stock split. Prior to the split, the stock sold for $ 60 per share. If the firm's total market value is unchanged by the split, what will the stock price be following the split? a. $20.40 b. $17.14 c. $14.74 d. $16.80 e. $13.54 28. Mortal Inc. expects to have a capital budget of $500,000 next year. The company wants to maintain a target capital structure with 40% debt and 60% equity, and its forecasted net income is $525,000. If the company follows the residual dividend model, how much in dividends, if any, will it pay? a. $189,000 b. $168,750 c. $281,250 d. $225,000 e. $272,250 29. Firms generally choose to finance temporary current assets with short-term debt because a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital. b. short-term interest rates have traditionally been more stable than long-term interest rates. c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. d. the yield curve is normally downward sloping. e. short-term debt has a higher cost than equity capital. 30. A lockbox plan is most beneficial to firms that a. have suppliers who operate in many different parts of the country. b. have widely dispersed manufacturing facilities. c. have a large marketable securities portfolio, and cash, to protect. d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks. e. have customers who operate in many different parts of the country. 7 31. Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60. 32. Which of the following items should a company report directly in its monthly cash budget? a. Its monthly depreciation expense. b. Cash proceeds from selling one of its divisions. c. Accrued interest on zero coupon bonds that it issued. d. New shares issued in a stock split. e. New shares issued in a stock dividend. 33. Which of the following statements is CORRECT? a. Trade credit is provided only to relatively large, strong firms. b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. e. Commercial paper is typically offered at a long-term maturity of at least five years. 34. Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory Conversion Period = Receivables Collection Period = Payables Deferral Period = a. b. c. d. e. 42 33 35 40 39 48 days 17 days 25 days days days days days days 35. Inmoo Company's average age of accounts receivable is 38 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle? a. 76 days b. 80 days c. 67 days d. 64 days e. 55 days 8 36. Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March? a. $27,060 b. $34,320 c. $33,000 d. $26,730 e. $33,990 37. Dyl Pickle Inc. had credit sales of $3,600,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year. a. $407,342 b. $362,466 c. $300,329 d. $403,890 e. $345,205 38. Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = Annual cost of goods sold = Inventory = Accounts receivable = Accounts payable = a. b. c. d. e. 42 32 51 34 40 $45,000 $26,500 $4,500 $1,800 $2,500 days days days days days 39. A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 75 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? a. 21.64% b. 20.51% c. 14.49% d. 18.81% e. 17.87% 40. A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.) a. 15.89% b. 19.86% c. 19.70% d. 17.64% e. 13.19% 9 ID: A Sample Exam Questions - Chapters 11 - 15 Answer Section 1. ANS: C PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (11-2) NPV 2. ANS: E The IRR would rank a project that cost $100 and had a 100% IRR ahead of a project that cost $1,000,000 and had an IRR of 90%. The larger project would increase the firm's value more, as the NPV would demonstrate. PTS: LOC: TOP: 3. ANS: LOC: TOP: 4. ANS: LOC: TOP: 5. ANS: 1 DIF: EASY NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (11-3) IRR B PTS: 1 DIF: EASY NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (11-8) Payback D PTS: 1 DIF: EASY NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (Comp.) Ranking methods B Learning Objective: LO 2 Level of Difficulty: Medium Feedback: Initial investment = $2,744,320 Length of project = n = 3 years Required rate of return = k = 13% Net present value = NPV PTS: 1 1 ID: A 6. ANS: C Learning Objective: LO 3 Level of Difficulty: Hard Feedback: Year 0 1 2 3 4 5 6 Creighton Inc. CF Cumulative CF $(2,165,800) $(2,165,800) 424,386 (1,741,414) 512,178 (1,229,236) 561,755 (667,481) 764,997 97,516 816,500 914,016 825,375 1,739,391 PB = Years before cost recovery + (Remaining cost to recover/ Cash flow during the year = 3 + ($667,481 / $764,997) = 3.87 years Since the payback period of 3.87 years is less than the decision criteria of 4 years, this project should be accepted. PTS: 1 7. ANS: B Learning Objective: LO 3 Level of Difficulty: Hard Feedback: Carmen Electronics i = 12% Cumulative PVCF Year 0 1 2 3 4 5 6 7 CF $(5,000,000) 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 1,200,000 PVCF $(5,000,000) 1,071,429 956,633 854,136 762,622 680,912 607,957 542,819 $(5,000,000 (3,928,571) (2,971,939) (2,117,802) (1,355,181) (674,269) (66,311) 476,508 PB = Years before cost recovery + (Remaining cost to recover/ Cash flow during the year = 6 + ($66,311 / $542,819) = 6.12 years Since the payback period of 6.12 years exceeds the decision criteria of 5 years, this project should be rejected. PTS: 1 2 ID: A 8. ANS: B Learning Objective: LO 5 Level of Difficulty: Medium Feedback: Initial investment = $1,200,000 Length of project = n = 4 years To determine the IRR, the trial-and-error approach can be used. Set NPV = 0. Try IRR =23.1%. The IRR of the project is 23.1 percent. Using a financial calculator, we find that the IRR is 23.119 percent. PTS: 1 3 ID: A 9. ANS: A Refer To: Ref 10-2 Learning Objective: LO 5 Level of Difficulty: Medium Feedback: PV of costs = $30,000,000 Length of project = n = 3 years Cost of capital = k = 20% Reference: Ref 10-3 Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. PTS: 1 4 ID: A 10. ANS: A Year 0 Cash flows -$300 Cumulative CF -$300 - 1 $150 -$150 - 2 $200* $50* 1.75* 3 $300 $350 - Payback 1.75 * Payback = last year before cum CF turns * positive + abs. val. last neg. cum CF/CF * in payback year. PTS: LOC: TOP: 11. ANS: 1 DIF: EASY NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (11-8) Payback E WACC: 10.00% Year 0 1 2 3 Cash flows -$825 $500 $400 $300 NPV = $185.52 PTS: LOC: TOP: 12. ANS: 1 DIF: EASY/MEDIUM NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (11-2) NPV E Year 0 1 2 3 4 Cash flows $300 $290 $280 $270 -$500 IRR 44.68% PTS: LOC: TOP: 13. ANS: 1 DIF: EASY/MEDIUM NAT: Analytic skills Students will acquire knowledge of capital budgeting and the cost of capital. (11-3) IRR D Year 0 1 2 3 4 5 Cash flows -$9,000 $2,000 $2,025 $2,050 $2,075 $2,100 IRR 4.46% PTS: 1 DIF: EASY/MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (11-3) IRR 5 ID: A 14. ANS: C WACC: 10.50% Year 0 1 2 3 4 Cash flows -$850 $300 $320 $340 $360 TV = Sum of comp'ed inflows: Compounded values $404.77 $390.73 $375.70 $360.00 $1,531.20 MIRR 15.85% Found as discount rate that equates PV of TV to cost, discounted back 4 years @ WACC MIRR 15.85% Alternative calculation, using Excel's MIRR function PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (11-6) MIRR 15. ANS: B WACC: 10.00% Year 0 1 2 3 4 Cash flows $525 $485 $445 $405 -$700 PV of CFs -$700 $477 $401 $334 $277 Cumulative CF -$700 -$223 $178 $512 $789 1.56 Payback = 1.56 16. 17. 18. 19. PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (11-8) Discounted payback ANS: B PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (12-4) Risk and project selection ANS: C PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. | Students will acquire knowledge of financial analysis and cash flows. TOP: (12-1) Relevant cash flows ANS: A PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. | Students will acquire knowledge of financial analysis and cash flows. TOP: (12-1) Relevant cash flows ANS: C Statement c is true; the others are false. The following table shows the required return for each project on the basis of its risk level. Project Risk Expected Return A B C D E High Average High Low Low 15% 12% 11% 9% 6% Req'd return for this risk 12% 10% 12% 8% 8% Decision accept accept reject accept reject PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (12-8) Risk and project selection 6 ID: A 20. ANS: D Year Depr. Rate 1 0.20 2 0.32 3 0.19 4 0.12 5 0.11 6 0.06 1.00 Basis Annual Depr. Year-end Book Value $50,000 $10,000 $40,000 $50,000 $16,000 $24,000 $50,000 $9,500 $14,500 $50,000 $6,000 $8,500 $50,000 $5,500 $3,000 $50,000 $3,000 $0 $50,000 Gross sales proceeds Book value, end of Year 4 Profit Tax on profit rate = 40% $6,500 8,500 -$2,000 -800 AT salvage value = market value +/ taxes $7,300 PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire knowledge of capital budgeting and the cost of capital. TOP: (12-2) Salvage value 21. ANS: D PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of capital structure. TOP: (13-2) Business risk 22. ANS: C PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of capital structure. TOP: (13-3) Optimal capital structure 23. ANS: A Fixed operating costs (F) $470,000 Variable costs per unit (V) $2.70 Sales price per unit (P) $3.90 Q BE = F / (P - V) = 391,667 PTS: LOC: TOP: 24. ANS: LOC: TOP: 25. ANS: LOC: TOP: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of capital structure. (13-2) Break-even analysis B PTS: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of dividend policy. (14-6) Stock split A PTS: 1 DIF: MEDIUM NAT: Analytic skills Students will acquire an understanding of dividend policy. (14-3) Residual dividend model 7 ID: A 26. ANS: D Capital budget Net income (NI) % Debt % Equity = 1.0 % Debt = Equity needed to support the capital budget = % Equity Capital budget = Dividends paid = NI Equity needed $11,000 $11,250 40% 60% $6,600 $4,650 Payout ratio = Dividends paid / NI = 41.33% PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of dividend policy. TOP: (14-3) Residual dividend model 27. ANS: B Number of new shares 7 Number of old shares 2 Old (pre-split) price $60.00 New price = Old price (Old shrs / New shrs) = $17.14 PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of dividend policy. TOP: (14-6) Stock split 28. ANS: D % Debt 40% % Equity 60% Capital budget $500,000 Net income $525,000 Equity requirement = Capital budget % Equity $300,000 Dividends = NI Equity requirement = $225,000 29. 30. 31. 32. PTS: LOC: TOP: ANS: LOC: TOP: ANS: LOC: TOP: ANS: LOC: TOP: ANS: LOC: TOP: 1 DIF: MEDIUM NAT: Analytic skills Students will acquire an understanding of dividend policy. (14-3) Residual dividend model A PTS: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of working capital management. (15-3) Current asset financing E PTS: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of working capital management. (15-6) Lockbox A PTS: 1 DIF: MEDIUM NAT: Analytic skills Students will acquire an understanding of working capital management. (15-4) Cash conversion cycle B PTS: 1 DIF: MEDIUM NAT: Analytic skills Students will acquire an understanding of working capital management. (15-5) Cash budget 8 ID: A 33. ANS: B PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (Comp.) Current asset financing 34. ANS: D Inventory Conversion Period = 48 days Receivables Collection Period = 17 days Payables Deferral Period = 25 days CCC = Inv Conv Period + Average Coll Period - Pay Def Period = 40 days PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (15-4) Cash conversion cycle 35. ANS: C CCC = Inv Conv Period + Rec Coll Period - Pay Deferral Period Age of receivables = Rec Conv Period = Age of inventory = Inv Conv Period = Age of payables = Pay Def Period = CCC = Inv Conv Period + Average Coll Period - Pay Deferral Period = PTS: LOC: TOP: 36. ANS: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of working capital management. (15-4) Cash conversion cycle C Payments: Cash 20% Pay 2nd month 40% Pay 3rd month 40% Collections Sales for mos. January February January $30,000 $6,000 $12,000 February $35,000 $7,000 March $35,000 Total collections for month: $6,000 $19,000 March $12,000 $14,000 $7,000 $33,000 PTS: LOC: TOP: 37. ANS: 1 DIF: EASY NAT: Analytic skills Students will acquire an understanding of working capital management. (15-5) Cash budget E Sales DSO 35 $3,600,000 Receivables = (Sales per day)(DSO) = Sales/365 DSO = $345,205 PTS: 1 DIF: EASY NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (15-8) Accounts receivable balance 9 38 days 69 days 40 days 67 days ID: A 38. ANS: A Annual sales $45,000 Annual cost of goods sold (COGS) $26,500 Inventory $4,500 Accounts receivable $1,800 Accounts payable $2,500 Days in year 365 Sales per day = $123.29 COGS per day = $72.60 Inv Conv Period = Inv/COGS per day = 61.98 Average Coll Period = Receivables/Sales per day = 14.60 Pay. Def. Period = Accounts payable/COGS per day = 34.43 CCC = Inv Conv Period + Average Coll Period - Pay Def Period = 42.15 days PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (15-4) Cash conversion cycle 39. ANS: D Discount % 3% Net days 45 Discount days 15 Actual days to payment 75 Nom. % cost = Disc %/(100 - Disc %) (365/(Actual days - Disc days)) Nom. % cost = 3.09% 6.08 = 18.81% The effective discount % is earned N times per year; the product is the nominal annual cost rate. PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (15-9) Trade credit: nom. cost 40. ANS: A Discount % 2% Net days 45 Discount days 8 Actual days to payment 58 EAR = [ 1 + Disc %/(100 - Disc %)] [365/(Actual days - Disc. Period)] - 1 = 15.89% PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of working capital management. TOP: (15-9) Trade credit: EAR cost 10