2024 – 1 The operating cycle begins when the firm receives the raw materials it purchased that would be used to produce the

1.The operating cycle

 

 begins when the firm receives the raw materials it purchased that would be used to produce the goods that the firm manufactures.

 

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

 

To measure operating cycle we need another measure called the days’ payables outstanding.

 

ends not with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

2.You are provided the following working capital information for the Ridge Company:

Ridge Company

Account$

 

Inventory$12,890

Accounts receivable12,800

Accounts payable12,670

 

Net sales$124,589

Cost of goods sold99,630

Operating cycle: What is the operating cycle for Ridge Company?

 

 

36 days

 

51 days

 

47 days

 

85 days

 

 

 

 

 

 

 

3.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.

 

 

124 clocks

 

15,294 clocks

 

26,154 clocks

 

161 clocks

4.The asset substitution problem occurs when

 

managers substitute riskier assets for less risky ones to the detriment of equity holders.

 

managers substitute less risky assets for riskier ones to the detriment of bondholders.

 

managers substitute less risky assets for riskier ones to the detriment of equity holders.

 

managers substitute riskier assets for less risky ones to the detriment of bondholders.

5.M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

 

How much are your cash flows today?

 

$150

 

$12.38

 

$15

 

$4.50

 

 

 

 

 

 

6.M&M Proposition 2: Melba’s Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm’s marginal corporate income tax rate is 35%. What is the appropriate WACC?

 

 

8.80%

 

7.44%

 

8.17%

 

6.35%

 

7.According to the text, the financial plan covers a period of

 

 

one year.

 

ten years.

 

none of these.

 

three to five years.

 

8.The financing plan of a firm will indicate

 

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the firm’s dividend policy, and the firm’s working capital policy.

 

the firm’s dividend policy, the desired capital structure for the firm, and the firm’s working capital policy.

 

the dollar amount of funds that has to be raised externally and the sources of funds available to the firm, the desired capital structure for the firm, and the firm’s dividend policy.

 

 

 

9.Payout and retention ratio: Tradewinds Corp. has revenues of $9,651,220, costs of $6,080,412, interest payment of $511,233, and a tax rate of 34 percent. It paid dividends of $1,384,125 to shareholders. Find the firm’s dividend payout ratio and retention ratio.

 

 

25%, 75%

 

69%, 31%

 

34%, 66%

 

66%, 34%