Card 0 of 20
If a firm's credit terms require payment within 45 days but allow a discount of 2 percent if paid within 15 days (using a 360 day year), the approximate cost/benefit of the trade credit terms is:
\[360 / (45 - 15)\] * \[2% / (100% - 2%)\]
Compare your answer with the correct one above
If a retailer's terms of trade are 3/10, net 45 with a particular supplier, what is the cost on an annual basis of not taking the discount? Assume a 360 day year.
\[360 / (45 - 10)\] * \[3% / (100% - 3%)\]
Compare your answer with the correct one above
A firm purchased $10,000 of merchandise inventory on May 1. The terms of the purchase were 2/10, net 30. The company would pay what amount on May 9?
A 2% discount on $10,000 = a $200 discount. $10,000 - $200 = $9,800.
Compare your answer with the correct one above
If the dollar price of the euro rises, which of the following will occur?
If the dollar price of the euro rises, then the euro is getting more expensive, thus the dollar is getting less expensive.
Compare your answer with the correct one above
One euro will buy US $1.48 and a British pound will buy US $2.06. What is the cross rate of euros per pound?
2.06/1.48=1.39
Compare your answer with the correct one above
A discount on accounts payables would encourage which of the following activities?
When offering a discount to a customer for paying earlier, a firm would forfeit some income in order to increase cash on hand.
Compare your answer with the correct one above
The overall cost of capital is the:
Firms must at least earn a rate of return on investments equal to their cost of capital, otherwise the investments are losing money and decreasing value.
Compare your answer with the correct one above
ABC company is determining how to finance some long term debt projects. ABC has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet ABC's financing requirements?
Common stock does not require payment, does not mature, and decreases the debt to equity ratio as there is no debt incurred.
Compare your answer with the correct one above
Using the capital asset pricing model, the required rate of return for a firm with a beta of 1.25 when the market return is 14% and the risk-free rate is 6% is:
Cost of retained earnings=6% + 1.25 (14% - 6%) = 16%
Compare your answer with the correct one above
The cost of debt most frequently is measured as:
Actual interest rates minus tax savings is the most frequently used measure for cost of debt.
Compare your answer with the correct one above
The benefits of debt financing over equity financing are likely to be highest in which of the following situations?
The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high and if there are few noninterest tax benefits.
Compare your answer with the correct one above
Of the following, which would not impact the CAPM formula in determining a firm's cost of retained earnings?
Treasury yield is the same as the risk-free rate, which would be included in CAPM as well as beta. Net income is not.
Compare your answer with the correct one above
Future payments must be discounted in a bond valuation in order to take into account the:
The process of accounting for time value of money is discounting.
Compare your answer with the correct one above
The discount rate is determined in advance for which of the following capital budgeting techniques?
In order to work with net present value, a discount rate must be calculated.
Compare your answer with the correct one above
Using the discounted cash flow method, estimate the cost of retained earnings for a firm with a stock price of $30, an estimated dividend at the end of the first year of $3 per share, and an expected growth rate of 10%.
$3/$30 + 10% = 20% Cost of retained earnings.
Compare your answer with the correct one above
The length of time required to recover the initial cash outlay of a capital project is determined by using the:
The payback method measures the time required to recover the initial investment.
Compare your answer with the correct one above
Which of the following statements is true regarding the payback method?
The payback method determines the number of years that it will take for a company to recoup or be paid back for its investment. The payback method does not consider the time value of money.
Compare your answer with the correct one above
Which of the following phrases could be used to describe the Discounted Cash Flow formula?
The Discounted Cash Flow formulas involving dividends, price, and growth is also known as the cost of retained earnings.
Compare your answer with the correct one above
Which one of a firm's sources of new capital usually has the lowest after-tax cost?
Debt is a cheaper source of financing than equity. In addition, there is a tax deduction for interest paid on debt.
Compare your answer with the correct one above
Which of the following rates is most commonly compared to the internal rate of return to evaluate whether to make an investment?
WACC is used as the hurdle rate within capital budgeting techniques. Investments that provide a return that exceeds the WACC should continuously add to the value of the firm.
Compare your answer with the correct one above