Question 1

Since easing the credit policy generally lengthens the collection period and worsens the aging schedule, why do firms ever ease their credit policies?

A.       Easing normally stimulates sales.

B.       Easing helps them collect on sales quicker.

C.       Easing increases the deferral period for payables.

D.       Easing decreases the current ratio.

E.        Easing decreases the DSO.

Question 2

Which of the following is generally true of firms that manage their inventories efficiently?

A.       They have a relatively low inventory turnover ratio.

B.       They have a relatively large number of production disruptions.

C.       They have a relatively low total assets turnover ratio.

D.       They have a relatively high cash conversion cycle.

E.        They have a relatively high inventory turnover ratio.

Question 3

Which of the following statements regarding working capital policy is NOT CORRECT?

A.       A company should hold a relatively large amount of cash or marketable securities, or have an adequate line of credit, if its sales tend to fluctuate in an uncertain manner.

B.       Because credit policy influences both sales and the average collection period, its credit policy affects a firm's working capital position.

C.       The cash budget is useful when estimating a firm's financing needs during the budget period.

D.       Carrying very low inventories reduces inventory carrying costs, but low inventories can result in lost sales and production stoppages.

E.        Working capital involves only current assets and current liabilities, hence a firm's working capital policy plays no role in capital budgeting decisions.

Question 4

You work for the CEO of a new company that plans to manufacture and sell a new product, a watch that has an embedded TV set and a magnifying glass crystal. The issue now is how to finance the company, with only equity or with a mix of debt and equity. Expected operating income is $400,000. Other data for the firm are shown below. How much higher or lower will the firm's expected ROE be if it uses some debt rather than all equity, i.e., what is ROEL - ROEU?

0% Debt, U 60% Debt, L

Oper. income (EBIT)     $400,000    $400,000

Required investment   $2,500,000   $2,500,000

% Debt                           0.0%          60.0%

$ of Debt                        $0.00       $1,500,000

$ of Common equity  $2,500,000     $1,000,000

Interest rate                   NA               10.00%

Tax rate                        35%                35%

A.       5.85%

B.       6.14%

C.       6.45%

D.       6.77%

E.        7.11%

Question 5

Senate Inc. is considering two alternative methods for producing playing cards. Method 1 involves using a machine with a fixed cost (mainly depreciation) of $12,000 and variable costs of $1.00 per deck of cards. Method 2 would use a less expensive machine with a fixed cost of only $5,000, but it would require a variable cost of $1.50 per deck. The sale price per deck would be the same under each method. At what unit output level would the two methods provide the same operating income (EBIT)?

A.       12,600

B.       14,000

C.       15,400

D.       16,940

E.        18,634

Question 6

Keys Financial has done extremely well in recent years, and its stock now sells for $175 per share. Management wants to get the price down to a more typical level, which it thinks is $25 per share. What stock split would be required to get to this price, assuming the transaction has no effect on the total market value? Put another way, how many new shares should be given per one old share?

A.       6.98

B.       7.00

C.       7.35

D.       7.72

E.        8.10

Question 7

Desai Inc. has the following data, in thousands. Assuming a 365-dayyear, what is the firm's cash conversion cycle?Annual sales = $45,000

Annual cost of goods sold = $30,000

Inventory = $4,500

Accounts receivable = $1,800

Accounts payable = $2,500

A.       28 days

B.       32 days

C.       35 days

D.       39 days

E.        43 days