CLASS / COURSE: FIN 370

QUESTION DESCRIPTION:

Multiple Choice (2 points each questions, total 10 points)

 

1.           Which of the following statements best represents what finance is about?

a.      How political, social, and economic forces affect corporations

b.      Maximizing profits

c.      Creation and maintenance of economic wealth

d.      Reducing risk

         

2.           Which of the following is NOT a benefit provided by organized security exchanges?

          a.   A continuous market

          b.   Establishing and publicizing fair security prices

          c.   Standardization of asset pricing models

          d.   Helping businesses raise new capital

         

3.           Which of the following generally have maturities of one year or less?

a.   Treasury bills

b. Money market mutual fund

c.   Commercial paper

d. Both a and c

e.   All of the above

 

4.           The question "Did the common stockholders receive an adequate return on their investment?" is answered through the use of:

a.   liquidity ratios.

b.   profitability ratios.

c.   coverage ratios.

d.   leverage ratios.

 

5.           Cost of capital is:

          a.   the coupon rate of debt.

          b.   a hurdle rate set by the board of directors.

          c.   the rate of return that must be earned on additional investment if firm value is to remain unchanged.

          d.   the average cost of the firm’s assets.

 

 

Word Problems (5 points each questions, total 10 points)

(Cash budget) Kim Marazzo was recently promoted to Chief Financial Officer of Rick Reisch Enterprises.  RRE has projected sales for the first eight months of 2008 as follows:

January	$ 100,000
February	120,000
March	150,000
April	250,000
May	$150,000
June	270,000
July	225,000
August	250,000

Of RRE’s sales, 10 percent is for cash, another 50 percent is collected in the month following sale, and 40 percent is collected in the second month following sale. November and December sales for 2007 were $200,000 and $175,000, respectively.

RRE purchases its raw materials from Silva & Associates two months in advance of its sales equal to 60 percent of their final sales price. The supplier is paid one month after it makes delivery. For example, purchases for April sales are made in February and payment is made in March.

In addition, RRE pays $20,000 per month for rent and $50,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter, beginning in March.

The company’s cash balance at December 31, 2007, was $27,000; a minimum balance of $15,000 must be maintained at all times. Assume that any short-term financing needed to maintain the cash balance is paid off in the month following the month of financing if sufficient funds are available. Interest on short-term loans (12 percent) is paid monthly. Borrowing to meet estimated monthly cash needs takes place at the beginning of the month. Thus, if in the month of April the firm expects to have a need for an additional $60,500, these funds would be borrowed at the beginning of April with interest of $605 (.12 × 1/12 × $60,500) owed for April and paid at the beginning of May.

Kim’s first duty on the job is to:

1. Prepare a cash budget for RRE covering the first seven months of 2008.
2. RRE has $240,000 in notes payable due in July that must be repaid or renegotiated for an extension. Will the firm have ample cash to repay the notes?

 

(Break-even point) Elena Samborski a hard-working analyst in the office of financial operations for Vikram Kundu, Inc. (a manufacturing firm that produces a single product). Her boss is a tyrant named Shirley Anderson and has developed the following cost structure information for VKI. All of it pertains to an output level of 10 million units. Using this information, find the break-even point in units of output for the firm.

Return on operating assets	=30%
Operating asset turnover	=6 times
Operating assets	= $20 million
Degree of operating leverage	= 4.5 times

SOLUTION DESCRIPTION: Completed Solution is attached. Click on Buy button and then download file to get full solution.

SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance