Quiz – Final Test

1. Financial Management 1 Zaroni Samadi 23 June 2010 Quiz – Final Test

2. Open book • Time: 45 minutes

3. 1 • Your company may have the opportunity to make a one-time sale provided it grants a new customer 30 days credit. • The sales price of the item is $95, the variable cost is $68, and the relevant interest rate is 1.2 percent per month. • What is the net present value of this sale if there is a 30 percent chance the customer will default on payment?

4. Answer 1 • NPV = -$68 + [(1  .30)  $95] / (1 + .012) = -$68 + $65.71 = -$2.29

5. 2 • On January 12, Jack’s purchased $3,250 worth of goods. • The terms of the sale are 3/10, net 20. • What is the cost of these goods if the payment is made on January 21?

6. Answer 2 • Cost of goods sold is discounted price = $3,250 × (1 − .03) = $3,152.50

7. 3 • A firm has an accounts payable period of 43 days, an inventory period of 61 days, and an accounts receivable period of 37 days. • What is the length of the operating cycle?

8. Answer 3 • Operating cycle = 61 + 37 = 98 days

9. 4 • Thomsen’s Supply has projected quarterly sales of $1,800, $2,200, $2,300, and $2,800, respectively, for the next year starting with the first quarter. • The accounts receivable period is 30 days. How much will the firm collect in Quarter 2? Assume that a quarter has 90 days.

10. Answer 4 • Quarter 2 collections = [(30 / 90)  $1,800] + [(60 / 90)  $2,200] = $2,066.67

11. 5 • You have a $90,000 line of credit with your local bank. • The interest rate is 7.5 percent compounded quarterly. • The loan agreement requires that 5 percent of the unused amount be maintained at the bank in a non-interestbearing account. • On average, you earn a rate of 1.25 percent per quarter on your short-term investments. • What is the effective annual rate of this agreement assuming you borrow the entire amount for the entireyear?

12. Answer 5 • Effective rate = [1 + (.075 / 4)]4 1 = .07714 = 7.71 percent

13. 6 • When you reconciled your checkbook to the bank, you had outstanding deposits of $6,418 and outstanding checks of $8,207. • Your adjusted check book balance is $4,509. What is the amount of the collection float?

14. Answer 6 • the amount of the collection float is outstanding deposits$6,418

15. 7 • On average, Lancaster, Inc. receives 100 checks each day. • The average amount of each check is $8,300. • The firm is considering installing a lockbox system which will reduce the average collection time by 2 days. • The bank will charge $.28 a check for the lockbox arrangement. • The daily interest rate on Treasury bills is .015 percent. • What is the net present value of the lockbox arrangement?

16. Answer 7 • Net present value = [100  $8,300  2] – [(100  $.28) /.00015] = $1,660,000  $186,667 = $1,473,333

17. 8 • You are analyzing a firm that receives an average of 280 checks each day with an average amount of $22 percheck. • These checks clear the bank on average in 1.5 days. • The applicable daily interest rate is .01 percent. • What is the present value of the float assuming that each month has 30 days?

18. Answer 8 • Present value of the float = 280  $22  1.5 = $9,240

19. 9 • Your firm is debating whether to lease or to buy an asset. • The asset costs $27,000, has a 3-year life, and will be worthless after the 3 years. • Leasing the asset will cost $9,500 a year. • Your firm uses straight-linedepreciation and has a tax rate of 34 percent. • What is the incremental cash flow for year 3 if your firmdecides to lease rather than buy?

20. Answer 9 • CF3 = -1  [$9,500  (1  .34) + ($27,000 / 3  .34)] = -1 × [$6,270 + $3,060] = -$9,330