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Question
Which of the following statements is CORRECT?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
d. Large corporations are taxed more favorably than proprietorships.
e. Corporate stockholders are exposed to unlimited liability.
Answer
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Related questions
Q:
A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.
a. True
b. False
Q:
The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.
a. True
b. False
Q:
Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.
a. True
b. False
Q:
If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
a. True
b. False
Q:
Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).
a. True
b. False
Q:
The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.
a. True
b. False
Q:
2 = $2,200,000 / Total assets
Total assets = $1,000,000
Q:
5 = $2,200,000 / Total assets
Total assets = $880,000
Q:
Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10, net 48 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? Do not round intermediate calculations.
a. $25,747
b. $31,927
c. $31,669
d. $22,143
e. $22,915
Q:
Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.
a. True
b. False
Q:
Multinational financial management requires that financial analysts consider the effects of changing currency values.
a. True
b. False
Q:
Last year Emery Industries had $450 million of sales and $225 million of fixed assets, so its Fixed Assets/Sales ratio was 50%. However, its fixed assets were used at only 85% of capacity. If the company had been able to sell off enough of its fixed assets at book value so that it was operating at full capacity, with sales held constant at $450 million, how much cash (in millions) would it have generated?
a. $38.14
b. $33.75
c. $30.38
d. $36.79
e. $27.68
Q:
Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its Fixed Assets/Sales ratio was 40%. However, its fixed assets were used at only 40% of capacity. Now the company is developing its financial forecast for the coming year. As part of that process, the company wants to set its target Fixed Assets/Sales ratio at the level, it would have had, had it been operating at full capacity. What target Fixed Assets/Sales ratio should the company set?
a. 13.3%
b. 14.1%
c. 16.0%
d. 18.2%
e. 18.4%
ANSWER: c
RATIONALE: Sales $250
Fixed assets $100
% of capacity utilized 40%
Sales at full capacity = Actual sales / % of capacity used = $625.00
u200b
Target FA/Sale ratio = Actual FA/Full capacity sales = 16.0%
LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category.
35. Fairchild Garden Supply expects $590 million of sales this year, and it forecasts a 15% increase for next year. The CFO uses this equation to forecast inventory requirements at different levels of sales: Inventories = $30.2 + 0.25(Sales). All dollars are in millions. What is the projected inventory turnover ratio for the coming year?
a. 3.84 times
b. 3.23 times
c. 3.63 times
d. 3.60 times
e. 3.40 times
ANSWER: e
RATIONALE: Current yr.'s sales $590
Growth rate 15%
Projected sales $678.5
Req. inventories = $30.2 + 0.25 Projected sales
= $30.2 + 0.25 $678.5 = $199.8
u200b
Inventory turnover ratio = Sales / Inventories = 3.40 times
u200b
LOCAL STANDARDS: United States - OH - Default City - N/A - Since we still do not have the Cengage Business School Outcomes, you do not need to include anything for this category.
Q:
A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
b. The company increases its dividend payout ratio.
c. The company begins to pay employees monthly rather than weekly.
d. The companys profit margin increases.
e. The company decides to stop taking discounts on purchased materials.
Q:
When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.
a. True
b. False
Q:
The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
a. True
b. False
Q:
Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.
a. True
b. False
Q:
When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.
a. True
b. False
Q:
The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.
a. True
b. False
Q:
As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds arise from transactions brought on by sales increases.
a. True
b. False
Q:
Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm.
a. True
b. False
Q:
Zervos Inc. had the following data for last year (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered? Do not round your intermediate calculations.
Original Revised
Annual sales: unchanged $110,000 $110,000
Cost of goods sold: unchanged $80,000 $80,000
Average inventory: lowered by $4,000 $20,000 $16,000
Average receivables: lowered by $2,000 $16,000 $14,000
Average payables: increased by $2,000 $10,000 $12,000
Days in year 365 365
u200b
a. 37.41 days
b. 28.57 days
c. 37.75 days
d. 34.01 days
e. 25.51 days
Q:
Dyl Pickle Inc. had credit sales of $5,000,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year.
a. $436,301
b. $426,712
c. $551,370
d. $570,548
e. $479,452
Q:
Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $22,500 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
a. $31,415
b. $33,855
c. $30,500
d. $26,840
e. $22,875
Q:
Which of the following statements is CORRECT?
a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 T) + Depreciation [Capital expenditures + u0394NOWC]), hence depreciation is set forth on a separate line in the cash budget.
b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
c. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
e. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.
Q:
Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $300,000 per year. On average, what is the dollar amount of costly trade credit (total credit free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.) Do not round intermediate calculations.
a. $29,055
b. $28,767
c. $27,904
d. $32,795
e. $26,466
Q:
A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 110 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?
a. 9.03%
b. 13.78%
c. 10.69%
d. 11.88%
e. 11.17%
Q:
Grullon Co. is considering a 8-for-4 stock split. The current stock price is $75.00 per share, and the firm believes that its total market value would increase by 6% as a result of the improved liquidity that should follow the split. What is the stock's expected price following the split?
a. $47.30
b. $41.34
c. $40.15
d. $39.75
e. $31.40
Q:
Whitman Antique Cars Inc. has the following data, and it follows the residual dividend model. Some Whitman family members would like more dividends, and they also think that the firm's capital budget includes too many projects whose NPVs are close to zero. If Whitman reduced its capital budget to the indicated level, by how much could dividends be increased, holding other things constant?
u200b
Original capital budget $3,000,000
New capital budget $2,150,000
Net income $3,500,000
% Debt 33%
u200b
a. $438,515
b. $626,450
c. $694,790
d. $558,110
e. $569,500
Q:
Chicago Brewing has the following data, dollars in thousands. If it follows the residual dividend model, what will its dividend payout ratio be?
Capital budget $5,700
% Debt 45%
Net income (NI) $3,300
u200b
a. 3.95%
b. 5.00%
c. 5.90%
d. 5.35%
e. 5.55%