What is the projection for next year’s inventory?

 

JBC Corp. declared a dividend of $2 per share, which was an increase of

25% from the prior year, yet JBC Corp. stock declined by 3% the day of the

announcement. RBG Corp. declared a dividend of $2 per share, which was

the same as the prior year, and its stock increased in value by 2% on the day

of the announcement. These events could be most readily explained by the

a. information effect.

b. expectations theory.

c. clientele effect.

d. residual dividend theory.

Final Examination

23

Introduction to Financial Management

88) High dividends may increase stock values due to all of the following reasons

except:

a. higher dividends allow companies to increase their proportion of external

equity financing.

b. higher dividends are used to signal higher expected future earnings.

c. dividends are more certain than capital gains.

d. dividends are used as a tool to minimize agency costs.

89) According to the clientele effect,

a. even if capital markets are perfect, dividend policy still matters.

b. companies should change their dividend policies to please their target group

of investors.

c. companies should avoid making capricious changes in their dividend policies.

d. companies should have dividend payout ratios of either 100% or 0%.

90) While Captive, Inc. has been in business for over 50 years, newly developed

products pushed the firm’s year-over-year growth rate to 35% during the latest three years. The firm is proud of its history of paying dividends, but the

vigorous recent growth of the firm has left it cash challenged. Which of the

following policies/procedures would you consider best under the circumstances?

a. Substitute a stock dividend for the current cash dividend.

b. Borrow long-term to pay the current dividend.

c. Enter into a long-term stock repurchase program.

d. Look seriously for a merger partner.

91) All of the following are rationales given for a stock dividend or split except:

a. the price will not fall proportionately to the share increase.

b. an optimum price range does not exist.

c. conservation of corporate cash.

d. there is positive informational content associated with the announcement.

92) Use the “percent of sales method” of preparing pro forma financial statements to determine the projection for next year’s inventory. Make the following assumptions: current year’s sales are $24,500,000; current year’s cost of

goods sold is $15,925,000; sales are expected to rise by 25%. The firm’s

investment in inventory in the current year is $3,621,300. What is the projection for next year’s inventory?

a. $5,555,000

b. $6,125,000

24

Final Examination

Introduction to Financial Management

c. $4,526,600

d. $3,981,250

93) Predicting a firm’s future financial needs includes all of the following steps

except:

a. estimation of projected sales and expenses.

b. determination of the firm’s financing needs for the period.

c. estimation of investment levels for current and fixed assets.

d. review of the firm’s sales revenues and expenses over all past planning periods.

94) Buster Enterprises’ projected sales for the first six months of 2008 are given

below:

Jan.  $400,000  April  $450,000   Feb.  $540,000  May  $480,000   Mar.  $350,000  June  $520,000

30% of sales are collected in cash at time of sale, 60% are collected in the

month following the sale, and the remaining 10% are collected in the second

month following the sale. Cost of goods sold is 70% of sales. Purchases are made

in the month prior to the sales, and payments for purchases are made in the

month of the sale. Total other cash expenses are $50,000/month. The company’s

cash balance as of February 28, 2008 will be $30,000. Excess cash will be

used to retire short-term borrowing (if any). Buster Enterprises has no short term

borrowing as of February 28, 2008. Assume that the interest rate on short-term

borrowing is 1% per month. The company must have a minimum cash balance of

$20,000 at the beginning of each month. What is Buster Enterprises’ earnings

before interest and taxes for April 2008?

a. $ 85,000

b. $159,000

c. $138,000

d. $135,000

95) All of the following are found in the cash budget except

a. accounts receivable.

b. new financing needed.

c. cash disbursements.

d. a net change in cash for the period.

Final Examination

25

Introduction to Financial Management

96) Fielding Wilderness Outfitters had projected its sales for the first six months

of 2008 to be as follows:

Jan.  $ 50,000  April  $180,000

Feb.  $ 60,000  May  $240,000

Mar.  $100,000  June  $240,000

Cost of goods sold is 60% of sales. Purchases are made and paid for two months

prior to the sale. 40% of sales are collected in the month of the sale, 40% are

collected in the month following the sale, and the remaining 20% in the second

month following the sale. Total other cash expenses are $40,000/month. The

company’s cash balance as of March 1st, 2008 is projected to be $40,000, and

the company wants to maintain a minimum cash balance of $15,000. Excess

cash will be used to retire short-term borrowing (if any exists). Fielding has no

short-term borrowing as of March 1st, 2008. Assume that the interest rate on

short-term borrowing is 1% per month. What is Fielding’s projected total receipts

(collections) for April?

a. $36,000

b. $124,000

c. -$4,000

d. $180,000

97) A company that increases its liquidity by holding more cash and marketable

securities is

a. going to have to sell common stock to raise the cash to become more liquid.

b. likely to achieve a higher return on equity because of higher interest income.

c. likely to achieve a lower return on equity because of the smaller rates of

return earned on cash and marketable securities compared to the firm’s other

investments.

d. going to maximize firm value because risk is decreased.

98) Which of the following actions would improve a firm’s liquidity?

a. selling bonds and increasing cash

b. increasing the company’s dividend payments

c. repurchasing stock

d. buying bonds

99) Which of the following actions would improve a firm’s liquidity?

a. buying machinery with long-term debt

b. purchasing inventories for cash

c. purchasing inventory on trade credit

d. purchasing inventory with long-term debt

26

Final Examination

Introduction to Financial Management

100) Your company buys supplies on credit terms of 2/10 net 45. Suppose the

company makes a purchase of $20,000 today. Which of the following payment options makes the most sense as a general rule?

a. Pay the bill on day 45 due to the time value of money.

b. Pay the bill as soon as possible to keep the supplier happy.

c. Pay the bill on day 10 to get the discount.

d. Either pay the bill on day 10 to get the discount, or wait until day 45

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