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Old 05-25-2004, 11:54 AM   #1
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Default Accounting/Finance BT: Could you help me out with a practice test I'm finishing?

I've got a midterm in a few days and I'm trying to finish this practice test. I've only got a few left that I haven't been able to figure out.

3) Assuming that we can earn a 13.5% return on accounts receivable, which of the following actions to finance an increase in our accounts receivable balance would be optimal?

A) a reduction in marketable securities which are earning a return of 14.2%
B) a decrease in inventories which are earning a 17.6% return
C) an increase in bank loans that would cost us 11.5%
D) an increase in accounts payable that would cost our firm 15%

8) 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?
D)none of the above

13) Assuming an after tax rate of 40%, the after-tax cost of a $200,000 dividend payment is:
A) $200,000
B) $70,000
C) $130,000
D) none of the above

14) A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock? (my book doesn't even have a formula for par value, so it's no help)

A) $40 per share
B) $44 per share
C) $4 per share
D) $3.00 per share

15) A firm has targeted a 40% growth in sales this year. Last year's cash as a percent of sales was 15%, accounts receivable 30%, and inventory 35%. What percentage growth in current liabilities is required to support the growth in sales under the percent-of-sales forecasting method?
A) 32%
B) 26%
C) 18%
D) Not enough information to tell

16)A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers?
A) Decreased receivables and increased bank loans
B) Increased receivables and increased bank loans
C) Increased payables and decreased bank loans
D) Increased payables and increased bank loans
(longer term would mean increased payables, but I'm not sure about bank loans. Cost of not taking the discount would be 55.62% and 10.49% respectively)

19)A firm has a debt to asset ratio of 75%, $240,000 in debt, and a net income of $48,000. Calculate the return on equity.
A) 60%
B) 20%
c) 26%
d) not enough information
(can you explain how to do this problem?)

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Old 05-25-2004, 12:51 PM   #2
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Default Here's my shot at it......

3 - C Borrow money at 11.5% to earn 13.5%
8 - C Seems like a trick question though. I don't know why the turnover ratio has anything to do with it. Not sure on this one.
13 - A Dividends are paid with after-tax income so there is no tax effect.
14 - C ($2,000,00 common stock / 500,000 shares)
15 - D I don't really understand this one so it must be D. :-)
16 - C Increase in payables due to customers have longer to pay and less likely to borrow funds so bank loans drop.
19 - A If debt to assets is 75%, then debt of $240,000 is 75% of X. Solve for X.
$240,000 / 75% = 320,000 in assets.
Assets - Debt = Equity $320,000 - 240,000 = 80,000 Equity.
$48,000 income / $80,000 equity = 60% return on equity

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Old 05-25-2004, 01:03 PM   #3
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Default Thanks for the help. All make sense except for #15, I'll have to figure that one out. It's probably

D) Not enough Info to tell.

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Old 05-25-2004, 01:03 PM
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