MGT 3470 B Midterm 2
Conceptual (40% of total grade, 2.5 points each)
1- Which of the following support a low-dividend policy?
I. A tax policy wherein the individual tax rate on dividends is greater than the tax
rate on capital gains
II. Uncertainty about the future financial stability of the issuer
III. Pension plans own the majority of the outstanding shares
IV. Corporate investors own the majority of the outstanding shares
A) I only
B) I and III only
C) II and IV only
D) II, III, and IV only
E) I, II, and IV only
2- A stock has a normal trading range of $22 to $30. The stock is currently selling at $41
a share. It would be common for a firm in this situation to:
A) Repurchase outstanding shares by issuing debt securities.
B) Do a reverse stock split to lower the market price of the stock.
C) Issue a one-time special dividend.
D) Increase the number of outstanding shares via a stock split.
E) Issue a liquidating dividend to lower the value of the firm.
3- A method of distributing a firm's earnings to shareholders such that the shareholders
can select when they want to claim the income for tax purposes is a:
A) Stock split.
B) Reverse stock split.
C) Stock dividend.
D) Liquidating dividend.
E) Stock repurchases.
4- Which of the following are true given a compromise dividend policy?
I. Firms try to avoid dividend cuts.
II. Firms prefer selling new equity as frequently as possible.
III. Firms prefer to maintain a target debt-equity ratio.
IV. Firms prefer limiting positive NPV projects to pay dividends.
A) I and III only
B) II and III only
C) I and IV only
D) I, III, and IV only
E) I, II, and III only
5- KLO, Inc. has three separate divisions. All three divisions produce sufficient cash
flows to fund their own operations. Management was just approached and asked if
they would be receptive to selling division three. Management accepted the offer
and now wants to distribute some of the excess funds from that sale to the
shareholders. Management is most likely to:
A) Declare a liquidating dividend.
B) Declare a special dividend.
C) Increase the regular dividend.
D) Declare a stock dividend.
E) Do a stock split.
6- A dividend becomes a liability of the issuer on the:
A) Date of record.
B) Declaration date.
C) Reinvestment date.
D) Payment date.
E) Ex-dividend date.
7- Micaleh's has always paid their suppliers in 30 days. The company just hired a new
financial officer who is changing the policy such that suppliers will now be paid
in 45 days. This change will ______ the accounts payable period and _______ the
cash cycle.
A) Increase; not affect
B) Increase; increase
C) Increase; decrease
D) Decrease; increase
E) Decrease; decrease
8- Which one of the following is a source of cash?
A) A sale of merchandise to a customer on credit
B) The purchase of new equipment for cash
C) The payment of a long-term debt
D) The purchase of goods from a supplier on credit
E) A stock repurchases
9- Which of the following statements is (are) correct concerning a flexible short-term
financial policy?
I. A flexible policy is most appropriate when carrying costs are low relative to
shortage costs.
II. A flexible policy entails the use of marketable securities.
III. A flexible policy requires more short-term bank loans than does a restrictive
policy.
IV. The optimal current asset holdings are higher under a flexible policy than
under a restrictive policy.
A) I and II only
B) I and III only
C) II and III only
D) II and IV only
E) I, II, and IV only
10- The process that transfers the responsibility for collecting accounts receivables from a
firm to a bank in exchange for a percent of the accounts receivables value is
referred to as:
A) Factoring.
B) Issuing trade credit.
C) Field warehousing.
D) Trust receipting.
E) An assignment.
11- A disruption in the production schedule due to a lack of materials is called a:
A) Cash-out.
B) Shortage cost.
C) Flexible cost.
D) Maturity hedging cost.
E) Compensating cost.
12- Which of the following statements are true concerning credit policy?
I. A firm that begins to offer credit to its customers may in fact increase its total
revenue as a result of the credit offering.
II. A seller must have a source of financing sufficient to cover any accounts
receivable balance created by introducing a credit policy.
III. The cost of sales will initially be delayed when a credit policy is first adopted.
IV. A customer who forfeits a cash discount is accepting a high cost for credit
financing.
A) I and II only
B) II and IV only
C) I, II, and III only
D) I, II, and IV only
E) I, II, III, and IV
13- Custom Furniture provides handcrafted furniture made from raw timber. Each piece
of furniture is custom designed with the color of the finish and the type of
hardware (handles, knobs, etc.) to be applied chosen by the customer. A piece of
furniture that has been cut and assembled and is now waiting for the finish and
hardware would be counted in the _______ inventory of Custom Furniture.
A) Raw materials
B) Derived demand
C) Finished goods
D) Work-in-progress
E) Customer hold
14- Which one of the following is the normal order of events when a firm is collecting an
account receivable from a customer?
I. Legal action
II. Phone call
III. Collection agency
IV. Delinquency letter
A) II, IV, III, I
B) III, IV, I, II
C) IV, III, II, I
D) IV, III, I, II
E) IV, II, III, I
15- Using the EOQ model, a manager can determine _____________. This allows the
firm to place orders before inventories reach a critical level, allowing for
sufficient delivery time.
A) Carrying costs
B) Safety stocks
C) Restocking costs
D) Reorder points
E) Theft losses
16- Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that
your firm intends to buy on credit, good cash management practice suggests that a
rational purchaser should pay only on which of the following days?
I. Day 2
II. Day 9
III. Day 10
IV. Day 20
V. Day 30
A) I, II, or V only
B) III or V only
C) II only
D) V only
E) I or II only
Problems (60% of total grade)
1- If a firm needs $5 million for a new investment and it has a target capital structure
(D/E = 2/3). The firm’s net income = $4 million. How much does the firm payout
in dividends? What is the firm’s dividend payout ratio? (5 points)
2- It is August 1, 2007. A firm expects sales over the next 4 months to be as follows:
Month
August
September
October
November
Sales Amount
$130,000
$80,000
$90,000
$95,000
Sales in June and July were $100,000 and $120,000 respectively. Twenty five
percent of these sales will be collected in the month of sale, 35% will be collected
in the first month after sale, and 40% will be collected two months after sale. A
3% discount is given for accounts paid in the first month after sale. The firm
purchases inventory of 70% of next month’s expected sales for cash. Wages,
taxes, and expenses are $45,000 per month. Currently, $8,000 of cash is on hand.
A minimum balance of $15,000 is required. Complete a cash budget for August,
September, and October. (13 points)
3- A firm has an $800,000 operating loan with a 12% compensating balance requirement.
The quoted interest rate is 7%. The firm needs to borrow $250,000 for inventory
for one year. How much does the firm actually need to borrow? What is the
interest rate the firm is effectively paying? (6 points)
Use the following information to solve problems 4 and 5
Inventory
A/R
A/P
Beginning
$27,000
$21,000
$10,000
Ending
$28,000
$22,000
$14,000
Credit sales = $175,000 and cost of goods sold = $125,000.
4- Calculate the firm’s operating cycle and cash cycle? (10 points)
5- If the firm factors receivables by discounting them 2%. What is the effective rate of
interest? (5 points)
6- The Trektronics store begins each week with 250 units in stock. This stock is depleted
each week and reordered. If the carrying cost per unit $28 per year and the fixed
order cost is $95, what is the total carrying cost? What is the restocking cost?
What is Trektronics’ total cost? Should Trektronics increase or decrease its order
size? If so, by how many units? What will Trektronics’ total cost be if it orders
inventory based on EOQ? (12 points)
7- A firm offers credit terms of 3/15 net 60. Bank financing is available at 16%. Calculate
the nominal cost of foregoing the discount, the firm’s effective annual interest
rate, and the bank’s effective annual interest rate. (9 points)