corporate finance

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1. Which of the following is NOT correct for a firm with seasonal sales and customers who all pay
promptly at the end of 30 days?
a. DSO will vary from month to month.
b. The quarterly uncollected balances schedule will be the same in each quarter.
c. The level of accounts receivable will be constant from month to month.
d. The ratio of accounts receivable to sales will vary from month to month.
e. The level of accounts receivable at the end of each quarter will be the same.
2. Which of the following statements is most correct?
a. If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales
also increases, then the firm's accounts receivable will automatically increase.
b. It is possible for a firm to overstate profits by offering very lenient credit terms which
encourage additional sales to financially "weak" firms. A major disadvantage of such a policy
is that it is likely to increase uncollectible accounts.
c. A firm with excess production capacity and relatively low variable costs would not be inclined
to extend more liberal credit terms to its customers than a firm with similar costs that is
operating close to capacity.
d. Firms use seasonal dating primarily to decrease their DSO.
e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original
sale took place on February 1st, the customer can take the discount up until March 15th, but
must pay the net invoice amount by April 1st.
3-Judy's Fashions, Inc. purchases supplies from a single supplier on terms of 1/10, net 20. Currently,
Judy takes the discount, but she believes she could extend the payment to 40 days without any
adverse effects if she decided not to take the discount. Judy needs an additional $50,000 to
support an expansion of fixed assets. This amount could be raised by making greater use of trade
credit or by arranging a bank loan. The banker has offered to loan the money at 12 percent
discount interest. Additionally, the bank requires an average compensating balance of 20 percent
of the loan amount. Judy already has a commercial checking account at this bank which could be
counted toward the compensating balance, but the required compensating balance amount is twice
the amount that Judy would otherwise keep in the account. Which of the following statements is
most correct?
a. The cost of using additional trade credit is approximately 36 percent.
b. Considering only the explicit costs, Judy should finance the expansion with the bank loan.
c. The cost of expanding trade credit using the approximation formula is less than the cost of
the bank loan. However, the true cost of the trade credit when compounding is considered is
greater than the cost of the bank loan.
d. The effective cost of the bank loan is decreased from 17.65 percent to 15.38 percent
because Judy would hold a cash balance of one-half the compensating balance amount even
if the loan were not taken.
e. If Judy had transaction balances that exceeded the compensating balance requirement, the
effective cost of the bank loan would be 12.00 percent.
4-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.
5-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.

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