FIN Final Exam – Attempt 1

  FIN Final Exam – Attempt 1 Question 1 4 out of 4 points Which of the following will cause an increase in net working capital, other things held constant? Selected Answer: b. Merchandise is sold at a profit, but the sale is on credit. Answers: a. Long-term bonds are retired with the proceeds of a preferred stock issue. b. Merchandise is sold at a profit, but the sale is on credit. c. A cash dividend is declared and paid. d. Missing inventory is written off against retained earnings. e. Cash is used to buy marketable securities. Question 2 4 out of 4 points Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage costof its non-free trade credit? (Assume a 365-day year.) Selected Answer: d. 23.45% Answers: a. 20.11% b. 22.28% c. 21.17% d. 23.45% e. 24.63% Response Rationale: Feedback: 2% Discount % Net days 15 Discount days Actual days to payment EAR = [1 + Disc. %/(100 − Disc. %)][365/(Actual days − Disc. Period)] −1 = 23.45% Question 3 4 out of 4 points Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.  Sales Accounts receivable Days sales outstanding (DSO) Benchmark days sales outstanding (DSO) Selected b. Answer: $9,973 Answers: a. $10,970 b. $9,973 c. $8,078 d. $12,067 e. $8,975 Response Rationale: Feedback: $110,000 $16,000 53.09 20.00 Original Data $110,000 Sales $16,000 Receivables and DSO New receivables = DSO × (Sales/365) = Reduction in receivables = Original receivables − New receivables = Benchmark Receivables at Benchmark Related DSO DSO Level 53.09 20.00 $6,027 $9,973 Alternative solution: (Change in DSO/Original DSO) × Orig. $9,973 receivables = Question 4 4 out of 4 points BLW Corporation is considering the terms to be set on the options it plans to issue to its executives. Which of the following actions would decrease the value of the options, other things held constant? Selected a. Answer: The exercise price of the option is increased.