1. Coverall Carpets Inc. is planning to borrow $12,000 from the bank. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?
2. During times of inflation, which of these inventory accounting methods is best for cash flow?
a. FIFO, because the cheapest goods are recorded as being sold first, resulting in lower cost of goods sold and higher reported net income.
b. LIFO, because the most expensive goods are recorded as being sold first, resulting in a higher cost of goods sold and a lower reported net income.
c. Specific identification, because it correctly identifies the actual item sold and so the actual cost is recorded on the income statement.
d. Weighted average, because it smoothes the reported cost of goods sold over time.
e. It doesn't matter which you use since cash flow is unaffected by the choice of inventory identification method.
3. Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*?
a. If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%,
then C* will increase by 20%
b. If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%.
c. If the average cash balance increases by 20%, then the total holding costs will increase by 20%.
d. If the average cash balance increases by 20% the total transactions costs will increase by 20%.
e. The optimal transfer amount is the same for all companies