Finance Practice Assessment
1. Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities? A. No external financing is required.
2. Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of returns? A. $28,800
3. Riley Co. is considering a short-term or long-term financing plan for $6,000,000 in assets. They expect the following 1 year rates over the next 3 years: 7%, 9%, and 12%. Their long-term interest rate will be 9% for the 3 years. Assuming the rates follow their expectations, what will be the difference in interest costs over the 3 years? A. Long-term interest will be $60,000 more than short-term interest B. Long-term interest will be $60,000 less than short-term interest C. Long-term interest will be $1,140,00 less than short-term interest D. None of these
4. Average daily remittances are $5 million, and "extended disbursement float" adds 3 days to the disbursement schedule, how much should the firm be willing to pay for a cash management system if the firm earns 10% on excess funds. A. $500,000
5. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales? A. $5,554.50
D. none of these.
6. Waldron Inc. is considering selling to a group of new customers that will bring in sales of $15,000 with a return on sales of 5%. The only new investment will be in accounts receivable. Waldron has a turnover ratio of 5 to 1 between sales and accounts receivable. What is the return on investment? A. 3%
D. none of these
7. Tanner Co. is a highly successful supplier of leather to manufacturers of leather goods. Tanner is considering expanding into the U.S. luxury auto seat market. It is estimated that although selling leather to U.S. auto manufacturers will bring additional annual sales of $700,000, a high 12% of those accounts will be uncollectible. The cost of conditioning and selling the leather is 70% of sales. Tanner's tax rate is 46%.
a) Calculate Tanner's incremental net income on the new sales. b) Assume Tanner has a receivables turnover of 5. Calculate Tanner's incremental accounts receivable investment and after-tax return on that investment. c) Tanner's minimum required ROI is 15%. Should Tanner expand into the auto market?
8. If you invest $8,000 at 12% interest, how much will you have in 7 years? A. $18,016
9. Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college? A. $11,250
10. Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $2,000 today. Which should she choose? A. the $1 million dollars in 50 years.
B. $2,000 today.
C. she should be indifferent.
D. need more information.
11. Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate. A. $19,033
D. none of these
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