EASTERN ILLINOIS UNIVERSITY
FIN 3770
Exam One Pre-Test
Name: ________________________________________
1) Swartz Spaghetti, Inc. projects sales of the company’s pasta will be as follows:
May
$1,100
June
$1,400
July
$1,300
August
$700
Cost of goods sold is equal to 70% of sales. The company maintains an ending inventory equal to 80% of the following
month’s cost of goods sold. Purchases are paid for 80% in the month of purchase and 20% in the following month.
Calculate the cash disbursed for purchases in July.
2) Which of the following would decrease the cash conversion period?
___ inventory turnover decreases
___ account payable turnover decreases
___ accounts receivable turnover increases
___ depreciation expense decreases
3) Which of the following would increase the cash conversion efficiiency?
___ inventory turnover decreases
___ account payable turnover decreases
___ accounts receivable turnover increases
___ profit margin increases
4) Which of the following would decrease Lamba?
___ short-term investments increase
___ profit margin increases
___ account payable turnover decreases
___ standard deviation of cash flow decreases
5) Which of the following would increase the sustainable growth rate?
___ dividends decrease
___ long-term debt increases
___ profit margin increases
___ net income increases
6) Which of the following would reduce the EOQ?
___ sales increase
___ fixed ordering costs increase
___ carrying costs decrease
___ quantity discounts increase
7) Which of the following would increase the amount of required safety stock?
___ variability of sales increases
___ carrying costs decrease
___ stock out costs increases
___ variability of delivery time decreases
8)
Discuss three costs of excessive inventory.
9)
Explain how commercial paper can help companies meet their liquidity requirements.
10) Discuss an example of how inventory can be held for speculation.
11) Why do companies with rapid sales growth often experience difficulties with cash flow?
12) Calculate the amount of cash received in 2009 by Young Yaks, Inc. using the following data:
Accounts Receivable, 1/1/09 $1,300 Accounts Receivable 12/31/09 $26,900 Sales $94,300
13) Calculate the amount of cash paid to suppliers in 2009 by Thurman Thatch, Inc. using the following data:
Accounts Payable, 1/1/09 $11,900 Accounts Payable 12/31/09 $13,700 Cost of Goods Sold $32,900
Inventory, 1/1/09 $22,200
Inventory 12/31/09 $9,100
14) Calculate the sustainable growth rate for Drake Ducks, Inc. sales using the following data for 2009:
Sales $100,000 Profit Margin 10% Dividends $2,000 Assets $120,000 Liabilities $50,000
15) Faller Fails FIN 3770, Inc. has EBIT of $600,000 in 2009. The company has a target capital structure of 20%
common stock, 80% debt and no preferred stock. The company’s cost of equity is 14% and debt is 6%. The
company’s marginal tax rate is 30%. If the company has short-term and long-term capital employed of $9,000,000
calculate EVA for 2009.
1
16) Ratliff Radishes is purchasing a computer system to track inventory in an effort to reduce the amount of spoilage
expense for the company. The cost to install the system is $170,000 and it is expected to have a useful life of 20
years. The company’s financial analyst, Soo Soo Strole, feels the project should have a risk premium of four percent
above the risk-free rate of return. Mr. Strole determines the company’s cost of debt is 8%, the company’s cost of
equity is 12%, the company’s tax rate is 40% and treasury bills currently yield 1%. What is the annual reduction in
spoliage expense necessary to justify the $170,000 cost of the computer system if the company estimates they can
sell the system for $25,000 twenty years from now?
County Seat, Inc.
Financial Statements
7/31/96
Cash
110,603
Accounts receivable
11,486
Inventory
32,580
Prepaid Expenses
3,915
Net Fixed Assets
60,223
Total Assets
218,807
Accounts payable
Current maturity longterm debt
Accrued expenses
Long-term debt
Common stock
Retained earnings
Total Debt and Equity
7/31/95
8,125
2,778
143,474
23,377
151,824
329,578
147,397
81,826
65,472
43,729
23,825
34,606
132,418
-201,265
21,451
163,851
113,879
-78,804
218,807
329,578
1996
1995
Sales
$243,331
$254,299
Cost of goods sold
195,812
190,061
Administrative expense
54,990
62,094
Depreciation expense
5,915
6,787
Net Income
$-13,386
$-4,643
17) Calculate the quick ratio for County Seat as of 7/31/96
18) Calculate the amount of working capital requirements for County Seat as of 7/31/96.
19) Calculate the amount of net liquid balance for County Seat as of 7/31/96.
20) Calculate the days inventory held for County Seat as of 7/31/96.
21) Calculate the days sales outstanding for County Seat as of 7/31/96.
22) Calculate the days payable outstanding for County Seat as of 7/31/96.
23) Calculate the cash conversion period for County Seat as of 7/31/96.
24) Martin Minced Mice (MMM) sells minced mice to French restaurants for $100 per mouse. It costs the company $60
to place an order for mice and holding costs per unit average $21. The company produces and sells 200,000 mice
every 365 days. The company currently orders lots of 10,000 mice at a price of $3 per mouse. Calculate the EOQ.
EOQ (2 xTxF) / H
25) Calculate the difference in inventory costs between the EOQ and the current order quantity of 10,000 mice.
26) If it takes four days to receive an order from a supplier and the company desires safety stock of 500 mice, at what
inventory level is the reorder point?
Questions from the readings will appear on the exam!
2