FIN 300 OLANDER EXAM 4

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Which one of the following statements is NOT true?

A. Working capital management involves making decisions regarding the use and sources of current assets.
B. Gross working capital is the funds invested in a company’s current liabilities.
C. Working capital efficiency refers to the length of time between when a working capital asset is paid for and when it is converted into cash.
D. Net working capital (NWC) refers to the difference between current assets and current liabilities.

Operating cycle: Trend Foods distributes its products to more than 100 restaurants and delis. The company’s collection period is 32 days, and it keeps its inventory for 10 days. What is Trend’s operating cycle?

22 days
32 days
42 days
None of these

Operating cycle: Le Baron Company, a men’s designer firm, has an operating cycle of 123 days. The firm’s days’ sales in inventory is 73 days. How much does the firm have in receivables if it has credit sales of $433,450? (Round to the nearest dollar.)

$64,233
$47,501
$59,377
$71,252

Cash conversion cycle: Wolfgang Electricals estimates that it takes the company 31 days on average to pay off its suppliers. It also knows that it has days’ sales in inventory of 54 days and days sales’ outstanding of 34 days. What is its cash conversion cycle?

57 days
46 days
34 days
119 days

Lockbox: Rocky Corp. has daily sales of $18,100. The financial manager determined that a lockbox would reduce the collection time by 2.2 days. Assuming the company can earn 6 percent interest per year, what are the savings from the lockbox? (Round to the nearest dollar.)

$2,389.20
$1,100.45
$39,820
$3,620.50

Factoring: A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm’s average collection period is one month. What is the dollar cost of the factoring service?

$4,250
$3,000
$4,500
$3,750

Economic order quantity: Jensen Autos, one of the largest car dealers in Eau Claire, sells about 700 vehicles a year. The cost of placing an order with their supplier is $1,100, and the inventory carrying costs are $120 for each car. Most of their sales are in late fall of each year.

What is the number of cars per order?

101 cars
58 cars
80 cars
113 cars

Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $85 per year to carry the alarm clock in inventory, use the EOQ formula to calculate the optimal order size.

26,154 clocks
161 clocks
15,294 clocks
124 clocks

Which one of the following statements is NOT true?

-For many smaller firms and firms of lower credit standing that have limited access, or no access, to the public markets, the cheapest source of external funding is often the private markets.
-Bootstrapping and venture capital financing are not part of the private market.
-Bootstrapping and venture capital financing are part of the private market.
-Many private companies that are owned by entrepreneurs, families, or family foundations and are sizable companies of high credit quality prefer to sell their securities in the private markets.

Which one of the following statements is NOT true?

-Private equity firms invest in more mature companies.
-Private equity investors focus on firms that have stable cash flows because they use a lot of debt to finance their acquisitions.
-Private equity firms invest in new companies.
-Private equity firms pool money from wealthy investors, pension funds, insurance companies, and other sources to make investments.

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC registration fees, and other administrative costs are $350,000. The firm’s stock price increases 15 percent on the first day.

What is the underpricing spread?

$51 million
$15 million
$66 million
None of the above

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC registration fees, and other administrative costs are $350,000. The firm’s stock price increases 15 percent on the first day.

What is the underpricing on this issue?

$9,900,000
$15,000,000
$24,900,000
None of these.

IPO pricing: Stump, Inc., a technology firm in Prairie View, Texas, issues a $66 million IPO priced at $17 per share, and the offering price to the public is $22 per share. The firm’s legal fees, SEC registration fees, and other administrative costs are $350,000. The firm’s stock price increases 15 percent on the first day.

What is the firm’s total cost of issuing the securities?

$15.35 million
None of these
$25.25 million
$24.9 million

General cash offering: Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $30 million to finance it. The company plans to raise the money through a general cash offering priced at $23.50 a share. Star’s underwriters charge a 6 percent spread. How many shares does the company have to sell to achieve its goal?

1,276,596 shares
1,358,081 shares
1,200,000 shares
None of these

Bank lending: Suppose two firms want to borrow money from a bank for a period of 10 years. Firm A has excellent credit and can borrow at the prime rate, whereas Firm B’s credit standing is prime + 2. The current prime rate is 5.75 percent, the 30-year Treasury bond yield is 4.35 percent, the three-month Treasury bill yield is 3.54 percent, and the 10-year Treasury note yield is 4.24 percent. What are the appropriate loan rates for each customer?

5.75%, 8.45%
None of these
6.45%, 7.75%
6.45%, 8.45%

The most likely reason that underpricing of new issues occurs more frequently than overpricing is the:

-Underwriters earn low rates of return.
-Demand for a new issue is typically too high.
-Underwriters’ desire to reduce the risk of a firm commitment.
-Issuing firms demand that equity be underpriced.

A firm is making an initial public offering. The investment bankers agree to a firm underwriting commitment of 500,000 shares priced to the public at $50 a share. The underwriter’s spread is 12%. In addition, the underwriter charges $600,000 in legal fees. On the first day of trading, the firm’s stock closed at $61. What were the total costs of the issue?

$9,100,000
$3,000,000
$3,600,000
$8,500,000

Why is the total cost of bringing a general cash offer to the market lower than issuing an IPO?

They do not include a large underpricing
Underwriting spreads are smaller
There is less risk involved with a general cash offer than an IPO
All of these

In using more sophisticated planning models, which one of the following statements is NOT true?

-Retained earnings will vary directly as sales changes.
-Long-term liabilities and equity accounts change as a -direct result of managerial decisions.
-Current liabilities are likely to vary directly with sales.
-All of these are true.

Which one of the following statements is NOT true?

-The economic order quantity (EOQ) mathematically determines the minimum total inventory cost.
-The EOQ ignores reorder costs and inventory carrying costs.
-The optimal order size is determined by the EOQ model.
-All of these.

Formal line of credit: Gibbs, Inc., has just set up a formal line of credit of $1 million with First National Bank. The line of credit is good for up to five years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $600,000 on the first day the credit line became available. What is the firm’s effective interest rate on this line of credit?

6.58%
8.00%
8.25%
7.25%

In accounting for changes in fixed assets, which one of the following statements is NOT true?

-When a firm is not operating at full capacity, sales may be increased without adding any new fixed assets.
-Since it requires time to get new assets operational, they are added in small discrete quantities.
-Fixed assets are added in large discrete amounts called lumpy assets.
-All of these are true.

Firms that achieve higher growth rates without seeking external financing

-have less equity and/or are able to generate high net income leading to a high ROE.
-have a low plowback ratio.
-are highly leveraged.
-none of these.

Addition to retained earnings: Tangent, Inc., has revenues of $4,375,233 and costs of $2,467,321, and pays a tax rate of 34 percent. If the firm pays out 60 percent of its earnings as dividends every year, what is the amount of retained earnings?

-$171,254.18
-$755,533.15
-$503,688.77
-None of the above

Payout and retention ratio: Drekker, Inc., has revenues of $312,766, costs of $220,222, interest payment of $31,477, and a tax rate of 34 percent. It paid dividends of $34,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

-55%, 45%
-15%, 85%
-85%, 15%
-45%, 55%

The bid quote is the rate at which the dealer will sell foreign currency.

False
True

A Eurodollar is defined as a U.S. dollar deposited in a bank outside the United States.

True
False

Long-term debt sold by a foreign firm to investors in a foreign country and denominated in that country’s currency is called a

-municipal bond.
-foreign bond.
-currency bond.
-Eurobond.

Bid-ask spread: A local bank has requested foreign exchange quotes for the Swedish krona from Citibank. Citibank quotes a bid rate of $0.1652/SK and an ask rate of $0.1667/SK. What is the bid-ask spread?

-2.1%
-1.2%
-0.9%
-0.65%

 

Hedging: Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of $0.6123/real. Assume that on the day the payment is due, the spot rate is at $0.6317/BR. How much would Tamcon save by hedging with a forward contract? Round to the nearest dollar.

-$779,152
-$803,838
-$31,278
-$24,687

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