The economic value of an entity will rise following an increase in:
Answer(s): A
Net cash flow represents the numerator in the formula used to derive the value of the entity. Therefore, the economic value of the entity will increase as net cash flow increases. Presented below are partial year-end financial statement data for entities.
The degree of financial leverage of B, to two decimal places, is:
Answer(s): B
The degree of financial leverage for B. may be calculated as profit before interest and taxes (PBIT), divided by PBIT minus interest. PBIT is 200 95 profit 10 interest 95 tax expense). Thus, the DFL is 1.05 [200 - 200 - 10)].
All other things held constant, external capital requirements are lower for entities with which one of the following characteristics?
Answer(s): C
The capital intensity ratio is the amount of assets required per dollar of sales. External financial requirements are lower if the capital intensity ratio is low because sales can grow rapidly without much outside capital, other things held constant.
The most direct way to prepare a cash budget for a manufacturing entity is to include:
Answer(s): D
The most direct way of preparing a cash budget requires incorporation of sales projections and credit terms. collection percentages, estimated purchases and payment terms, and other cash receipts and disbursements. In other words, preparation of the cash budget requires consideration of both inflows and outflows.
An entity has a majority of its customers located in states A and B. A major west coast bank has agreed to provide a lockbox system to the entity at a fixed fee of US $50,000 per year and a variable fee of US $0.50 for each payment processed by the bank. On average, the entity receives 50 payments per day, each averaging US $20,000. With the lockbox system, the entity's collection float will decrease by 2 days. The annual interest rate on money market securities is 6%. If the entity makes use of the lockbox system, what would be the net benefit to the entity? Use 365 days per year.
If payments are collected 2 days earlier. the entity can earn US $120,000 $20,000 50 payments per day 2 days .06) at a cost of US $59,125 [$50,000 + 50 payments 365 days $.50)], a gain of US $60,875.
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