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Questions and Answers
What is the effect on the current ratio if Niska Corporation uses $100,000 cash to pay down $100,000 of accounts payable?
What is the effect on the current ratio if Niska Corporation uses $100,000 cash to pay down $100,000 of accounts payable?
- The current ratio will remain unchanged. (correct)
- The current ratio will fluctuate unpredictably.
- The current ratio will increase.
- The current ratio will decrease.
By how much did the net income of Niska Corporation change from Year 1 to Year 2?
By how much did the net income of Niska Corporation change from Year 1 to Year 2?
- Increased by $60. (correct)
- Decreased by $180.
- Increased by $180.
- Decreased by $60.
Which company's net profit margin was the highest among the applicants for Marble Savings Bank?
Which company's net profit margin was the highest among the applicants for Marble Savings Bank?
- Sonex (correct)
- Industry Average
- Bailey
- Nutron
What was the operating income for Niska Corporation in Year 2?
What was the operating income for Niska Corporation in Year 2?
Which option correctly describes the trend in operating income and net income for Niska Corporation from Year 1 to Year 2?
Which option correctly describes the trend in operating income and net income for Niska Corporation from Year 1 to Year 2?
What financial leverage does Nutron exhibit according to the provided data?
What financial leverage does Nutron exhibit according to the provided data?
Which company has the lowest current ratio compared to the industry average?
Which company has the lowest current ratio compared to the industry average?
What should Marble Savings Bank consider most when selecting a loan application based on the data?
What should Marble Savings Bank consider most when selecting a loan application based on the data?
What determines the optimal capital budget for a firm?
What determines the optimal capital budget for a firm?
What is the primary advantage of a call provision for an organization?
What is the primary advantage of a call provision for an organization?
A firm's optimal capital structure primarily aims to achieve which of the following?
A firm's optimal capital structure primarily aims to achieve which of the following?
Kielly Machines Inc. is planning to raise funds based on their target capital structure. What is the proportion of equity they plan to utilize?
Kielly Machines Inc. is planning to raise funds based on their target capital structure. What is the proportion of equity they plan to utilize?
In calculating Kielly's weighted average cost of capital, which cost is factored in for debt, after considering the marginal tax rate?
In calculating Kielly's weighted average cost of capital, which cost is factored in for debt, after considering the marginal tax rate?
If Kielly Machines Inc. had a 40% marginal tax rate, what is the after-tax cost of debt based on a before-tax cost of 11%?
If Kielly Machines Inc. had a 40% marginal tax rate, what is the after-tax cost of debt based on a before-tax cost of 11%?
What percentage of Kielly's net income was paid out in dividends?
What percentage of Kielly's net income was paid out in dividends?
What is the weighted average cost of capital for Kielly Machines Inc. given the data provided?
What is the weighted average cost of capital for Kielly Machines Inc. given the data provided?
What distinguishes risk in investing from other types of risk?
What distinguishes risk in investing from other types of risk?
Which method should a portfolio manager use to estimate the worst-case expected loss at an 80% confidence level?
Which method should a portfolio manager use to estimate the worst-case expected loss at an 80% confidence level?
If a portfolio has a mean return of 8% and a standard deviation of 25%, what does the standard deviation represent?
If a portfolio has a mean return of 8% and a standard deviation of 25%, what does the standard deviation represent?
What is the primary focus of the Capital Asset Pricing Model in investment risk?
What is the primary focus of the Capital Asset Pricing Model in investment risk?
Why is it not possible to manage investment risk with insurance like other types of risks?
Why is it not possible to manage investment risk with insurance like other types of risks?
Which statements accurately reflect Mega's investment strategy regarding internal rates of return and the overall average cost of capital?
Which statements accurately reflect Mega's investment strategy regarding internal rates of return and the overall average cost of capital?
What is the primary purpose of sensitivity analysis in capital budgeting?
What is the primary purpose of sensitivity analysis in capital budgeting?
What can logically be inferred about Company A having a formal corporate code of ethics compared to Company B?
What can logically be inferred about Company A having a formal corporate code of ethics compared to Company B?
Which statement is true regarding the implications of a company's code of conduct stating 'Our employees are our most valuable asset'?
Which statement is true regarding the implications of a company's code of conduct stating 'Our employees are our most valuable asset'?
In capital budgeting, which of the following is NOT a focus of sensitivity analysis?
In capital budgeting, which of the following is NOT a focus of sensitivity analysis?
Which inference can be made about the ethical environment of Company B lacking a corporate code of ethics?
Which inference can be made about the ethical environment of Company B lacking a corporate code of ethics?
How does the presence of a corporate code of ethics affect employee behavior in Company A compared to Company B?
How does the presence of a corporate code of ethics affect employee behavior in Company A compared to Company B?
Which of the following best reflects a commitment to ethical leadership in a company?
Which of the following best reflects a commitment to ethical leadership in a company?
What is the company's acid test (quick) ratio?
What is the company's acid test (quick) ratio?
What is Lancaster's average accounts receivable turnover ratio for the year?
What is Lancaster's average accounts receivable turnover ratio for the year?
What are the fixed costs incurred by Carlisle Company in a year?
What are the fixed costs incurred by Carlisle Company in a year?
What is the degree of operating leverage for Carlisle Company?
What is the degree of operating leverage for Carlisle Company?
If Birch's current liabilities are $1,300,000, what will happen to the firm's quick ratio if $100,000 cash is used to purchase inventory?
If Birch's current liabilities are $1,300,000, what will happen to the firm's quick ratio if $100,000 cash is used to purchase inventory?
Which financial metric assesses a company’s ability to meet its short-term liabilities with its most liquid assets?
Which financial metric assesses a company’s ability to meet its short-term liabilities with its most liquid assets?
What is the total current assets value for Birch Products Inc.?
What is the total current assets value for Birch Products Inc.?
What is the selling price of each bottle of perfume produced by Carlisle Company?
What is the selling price of each bottle of perfume produced by Carlisle Company?
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Study Notes
Liquidity Ratios
- Acid test (quick) ratio formula: (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.
- Current assets: Accounts receivable ($200,000), cash ($100,000), total current liabilities ($80,000 + $10,000 + $50,000).
- Calculate quick ratio to determine short-term liquidity position.
Accounts Receivable Turnover
- Net accounts receivable decrease from $168,000 to $147,000; net income at $204,000 from total sales of $1,700,000.
- Cash sales account for 6% of total sales, affecting accounts receivable collection.
- Accounts receivable turnover ratio assesses efficiency in managing receivables; multiple-choice question provides answer choices.
Operating Leverage
- Carlisle Company sells 400,000 bottles of perfume at $1.00 each with a variable cost of $0.84.
- Annual fixed costs amount to $28,000 with interest expense of $6,000 and preferred stock dividends of $2,000.
- Degree of operating leverage indicates sensitivity of EBIT to changes in sales volume.
Current Ratio Analysis
- Birch Products Inc. totals current assets at $2,600,000 against current liabilities of $1,300,000.
- Current ratio results influence liquidity assessment based on cash utilization for inventory or accounts payable.
- Impacts on quick and current ratios determined by strategic cash management choices.
Financial Performance Metrics
- Niska Corporation shows asset growth from $18,000 to $26,000; market value of equity increased from $18,000 to $60,000.
- Analyzing sales ($1,000 to $1,300) and operating income ($500 to $600) helps gauge operational efficiency.
- Common-size income statement facilitates year-over-year performance evaluations.
Strategic Loan Evaluation
- Marble Savings Bank compares potential loan applicants (Bailey, Nutron, Sonex) based on financial metrics against industry averages.
- Variables include total sales, net profit margin, current ratio, return on assets, debt/equity ratio, and financial leverage.
Capital Budgeting Decisions
- Firms optimize capital budgets by assessing marginal cost of capital against projected investment returns.
- Accepting projects exceeding marginal cost maximizes profitability and efficiency.
Corporate Governance and Ethics
- A formal corporate code of ethics aids in establishing standards and guiding employee behavior.
- Company A's code may indicate higher ethical standards than Company B, impacting audit feasibilities.
Risk Management in Investments
- Risk in investing encompasses both potential gains and losses, unlike other risks that may only represent potential losses.
- Investment risk can often be greater due to volatility and market dynamics versus operational risks which are manageable.
Portfolio Risk Assessment
- A portfolio manager estimates potential loss using Value-at-Risk (VaR) methodology given mean return, standard deviation, and current portfolio value.
- VaR demonstrates the worst-case expected loss at a specific confidence level.
Weighted Average Cost of Capital (WACC)
- Kielly Machines Inc.'s funding strategy aims to maintain optimal capital structure via debt, preferred stock, and equity percentages.
- Considerations include tax impacts and cost of capital calculations for financial decision-making.
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