Short-term, unsecured promissory notes issued by large entities are known as:
Answer(s): C
Commercial paper is the term for the short-term typically less than 9 months) unsecured, large denomination often over US $100,000) promissory notes issued by large. creditworthy companies to other companies and institutional investors. In many instances, the maturity date is only a few days after issuance.
An entity borrows funds from its bank for a one-year period. The bank charges interest at a nominal rate of 15% per annum, on a discount basis, and requires a 10% compensating balance.The effective annual interest rate on the loan is:
Discount interest is subtracted before the loan proceeds are paid to the borrower.A compensating balance is an amount that the borrower must keep on deposit with the lender.The effective annual interest rate is increased by both the discount interest arrangement and by the compensating balance requirement: The effective rate equals the nominal rate dividend by one minus the sum of the nominal rate and 'the compensating balance percentage, or 20% [.15 - 1.0 - .15 - .1 O)].
An entity has made the decision to finance next year's capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be the:
Answer(s): D
A weighted average of the costs of all financing sources should be used, with the weights determined by the usual financing proportions. The terms of any financing raised at the time of initiating a particular project do not represent the cost of capital for the entity.When an entity achieves its optimal capital structure, the weighted-average cost of capital is minimized. The cost of capital is a composite, or weighted average, of all financing sources in their usual proportions. The cost of capital should also be calculated on an after-tax basis.
When an entity increases its degree of financial leverage DFL), the:
The DFL equals the percentage change in FPS earnings available to ordinary shareholders)divided by the percentage change in net operating profit or loss.When the DFL rises, fixed interest charges and the riskiness of the entity rise. As a result, the variability of returns will increase. In other words, the standard deviation of returns of the entity rises.
In its first year of operations, an entity had US $50,000 of fixed operating costs. It sold 10,000 units at a US $10 unit price and incurred variable costs of US $4 per unit. If all pnc es and costs will be the same in the second year and sales are projected to rise to 25,000 units, what will the degree of operating leverage the extent to which fixed costs are used in the entity's operations) be in the second yc _u?
Answer(s): B
The DOL may be calculated as the contribution margin sales - variable cost) divided by the excess of the contribution margin ever It <:ed costs. The contribution margin is US $150.000 [25.000 units x $10 unit price $4 unit variable cost)]. Hence, the DOL in the second year is 1.50 [US $150,000 CM ÷ $150,000 $50,000 FC)].
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