What is the expected average collection period for the entity?
Answer(s): C
The average collection period is the average time it takes to receive payment from customers because one-half of the customers will pay on day 10 and half will pay on day 30, the average collection period is 20 days [.5(10 days) + .5(30 days)]. An entity sells 10,000 skateboards a year at US $66 each. All sales are on credit, with terms of 3/10, net 30, which means three percent discount if payment is made within 10 days; otherwise full payment is due at the end of 30 days. One half of the customers are expected to take advantage of the discount and pay on day 10. The other half are expected to pay on day 30. Sales are expected to be uniform throughout the year for both types of customers.
Assume that the average collection period is 25 days. After the credit policy is well established, what is the expected average accounts receivable balance for the entity at any moment in time, assuming a 365-day year?
Answer(s): D
The expected average accounts receivable balance equals the average collection period times the credit sales per day. Thus, the average accounts receivable balance is US $45.205.48 {[(10,000 units sold on credit x $66 price) - 365 days] x 25 days}. The foregoing calculation assumes that receivables are recorded at their gross amounts.
A common mistake in valuing the entity to be acquired in a business combination is:
If the net incremental cash flows to the acquirer's shareholders are to be valued, the discount rate used should be the cost of equity capital. Moreover, this rate should reflect the risk associated with the use of funds rather than their source. The rate therefore should not be the cost of capital of the acquirer but rather the cost of equity of the combined entity after the combination. This calculation requires a new estimate of beta to be used in the Capital Asset Pricing Model.
The appropriate discount rate to use in valuing a business combination is the:
If the not incremental cash flows to the acquirer's shareholders are to be calculated, the discount rate used should be the cost of equity capital. Moreover, this rate should reflect the risk associated with the use of funds rather than their source. The rate therefore should not be the cost of capital of the acquirer but rather the cost of equity of the acquire after the combination. This calculation requires a new estimate of beta to be used in the Capital Asset Pricing Model.
An entity has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is somewhat concerned that the market price of this stock could decrease over the short run. The entity could hedge against the possible decline in the stock's market price by:
Answer(s): B
A put option is the right to sell stock at a given price within a certain period. If the market price falls, the put option may allow the sale of stock at a price above market, and the profit of the option holder will be the difference between the price stated in the put option and the market price, minus the cost of the option, commissions, and taxes. The entity that issues the stock has nothing to do with put and call) options.
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