FE 467 Midterm 1 | Course Paper

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1) narrbegin: bavarian credit terms

bavarian brew credit terms

bavarian brew is producing and selling brewery equipment to microbreweries

nationwide. bavarian is charging $15,000 per unit and all of their sales are on credit.

under the current credit policy bavarian brew expects to sell 500 units. the variable

costs are $6,000/unit and fixed costs are $1,500,000 per year. the company is thinking

about changing their credit terms from net 30 to 3/10 net 30. the effect of this change

would be a 5% increase in unit sales, but also an increase in bad debt expenses from 2%

to 4% of sales. the company expects 75% of its customers to take advantage of the cash

discount. currently the company has an average collection period of 38 days, 30 days

until the customers mail their payments and another 8 days to process the payments

once they arrive. bavarian brews opportunity cost of funds invested in accounts

receivable is 12%.

narrend

what is bavarian brews average investment in accounts receivables under the new credit

policy?

a.$198,488

b.$302,013

c.$215,753

d.$236,407

2) a bond issue with specifically designated bonds maturing each year is a(n)

a.mandated redemption issue

b.sinking issue

c.serial issue

d.sequential issue

3) the drawbacks of going public include all but:

a.financial costs of an ipo such as printing, accounting and legal costs and the

underwriter’s discount

b.managerial costs of an ipo such as new time constraints upon top executives

c.the emphasis by the new owners upon the firm’s stock price

d.life in a fishbowl in the sense that certain information about the firm’s internal affairs

must now be released to the public

e.all of the above are potential drawbacks to going public

4) if a firm increases its use of financial leverage, then what would we generally expect

for the shareholders of that firm to

a.lower their demand for return on their investment

b.remain indifferent with respect to their return on investment

c.increase their demand for return on their investment

d.it is not possible to tell what will happen

5) most of the capital for early venture funds came from

a.corporate backers

b.wealthy individuals

c.family trusts

d.all of the above

6) narrbegin: normaltown corporation

normaltown corporation

an analyst has predicted the free cash flows for normaltown corporation for the next

four years:

narrend

after 2007, the free cash flows are expected to grow at an annual rate of 5%. if the

weighted average cost of capital is 12% for normaltown, find the enterprise value of the

firm.

a.$54.98 million

b.$301.81 million

c.$313.00 million

d.$331.43 million

7) capital budgeting must be placed on an incremental basis. this means that ____ must

be ignored and ____ must be considered.

a.sunk cost; opportunity cost

b.sunk cost; financing cost

c.cannibalization; opportunity cost

d.opportunity cost; net working capital

8) if you are anticipating purchasing shares of companies that will be offering shares to

the public for the first time, your most profitable strategy for purchasing those shares

will be

a.to buy them in the primary market

b.to buy them in the secondary market

c.buy options on the shares before the ipo date

d.none of the above

9) consider the adjusted closing prices for louis stock

what is the variance of returns for louis stock?

a.0.041

b.0.054

c.0.233

d.0.202

10) a company that does not pay its debts when they come due is called

a.insolvent

b.debtor in possession

c.broke

d.financially distressed

11) the overall impact of foreign exchange rate fluctuations on a firms value is called

a.interest rate risk

b.transaction exposure

c.economic exposures

d.none of the above

12) a stock purschased on the new york stock exchange is an example of

a.a primary, money market transaction

b.a secondary, money market transaction

c.a primary, captial market transaction

d.a secondary, captial market transaction

13) goodwill reflects

a.the premium that an acquiring firm is willing to pay in excess of net asset market

value for a target firm

b.the premium that an acquiring firm is willing to pay in excess of net asset book value

for a target firm

c.the premium that an acquiring firm is willing to pay in excess of net asset market

value, if that premium is paid for with securities instead of cash

d.none of the above

14) which of the following is true concerning publicly traded companies?

a.the number of companies that pay dividends has been declining over time

b.the aggregate payout (dividend payout) of companies has increased over time

c.the aggregate payout (dividend payout) of companies has decreased over time

d.a and b

15) kenly bennett xiv wants to short shares of axline industries. however his broker can

not find shares available to short. to synthetically produce a short strategy on axline

industries, kenly could

a.buy a put, sell a zero coupon bond with a face value equal to the strike price of the put

and the call, and sell a call

b.buy a put, sell a zero coupon bond with a face value equal to the strike price of the put

and the call, and buy a call

c.sell a put, buy a zero coupon bond with a face value equal to the strike price of the put

and the call, and sell a call

d.buy a put, buy a zero coupon bond with a face value equal to the strike price of the

put and the call, and sell a call

16) the procedures used by a company to collect overdue or delinquent accounts

receivable are called

a.credit monitoring

b.collection policy

c.aging of accounts receivable

d.payment pattern monitoring