FIN3702 Assignment 2 (DETAILED ANSWERS) Semester 1 2024 - DISTINCTION GUARANTEED

FIN3702 Assignment 2 (DETAILED ANSWERS) Semester 1 2024 - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED - DISTINCTION GUARANTEED Answers, guidelines, workings and references ......... Question 1 Not yet answered Marked out of 1.00 QUIZ Commercial banks lend unsecured short-term funds in the following three basicways. 1. Single-payment notes, lines ofcredit, and commercial paper. 2. Single-payment notes, lines ofcredit, and revolving creditagreements. 3. Single-payment notes, revolvingcredit agreements, andcommercial paper. 4. Commercial paper, lines ofcredit, and revolving creditagreements. Question 2 Not yet answered Marked out of 1.00 Question 3 Not yet answered Marked out of 1.00 Tinashe Mining borrowed R100 000 forone year under a line of credit with astated interest rate of 7.5% and a 15%compensating balance. Normally, thefi rm keeps almost no money in itschecking account. Based on thisinformation, the effective annual interestrate on the loan is approximately … 1. 7.2%. 2. 7.5%. 3. 8.0%. 4. 8.8%. In the next planning period, a fi rm plansto change its policy of all cash sales andinitiate a credit policy requiring paymentwithin 30 days. The statements that willbe directly affected immediately are the… 1. pro forma balance sheet andcash budget. 2. cash budget and statement ofretained earnings. 3. pro forma income statement andpro forma balance sheet. 4. pro forma income statement, proforma balance sheet and cashbudget. Question 4 Not yet answered Marked out of 1.00 Other things held constant, which of thefollowing would tend to reduce the cashconversion cycle? 1. Take all discounts that areoffered. 2. Offer longer payment terms tocustomers. 3. Carry a constant amount ofreceivables as sales decline. 4. Continue to take all discountsthat are offered and pay on thenet date. 5. Place larger orders for rawmaterials to take advantage ofprice breaks. Question 5 Not yet answered Marked out of 1.00 Which one of the following statements isNOT correct? 1. Credit policy has an impact onthe working capital because itinfl uences both sales and thetime before receivables arecollected 2. The cash budget is useful tohelp estimate future fi nancingneeds, especially the need forshort-term working capitalloans. 3. If a fi rm wants to generate morecash fl ow from operations in thenext month or two, it couldchange its credit policy from2/10 net 30 to net 60. 4. Managing working capital isimportant because it infl uencesfi nancing decisions and thefi rm’s profi tability 5. A company may hold a relativelylarge amount of cash andmarketable securities it if isuncertain about the volume ofsales, profi ts, and cash fl owsduring the coming year. Question 6 Not yet answered Marked out of 1.00 Which of the following statements iscorrect? 1. Commercial paper is a form ofshort-term fi nancing that isprimarily used by large, strong,and fi nancially stablecompanies. 2. Short-term debt is favoured byfi rms because while it isgenerally more expensive thanlong-term debt, it exposes theborrowing fi rm to less risk thanlong-term debt. 3. Commercial paper can be issuedby virtually any fi rm so long as itis willing to pay the goinginterest rate. 4. Commercial paper is typicallyoffered at a long-term maturityof at least fi ve years. Question 7 Not yet answered Marked out of 1.00 Question 8 Not yet answered Marked out of 1.00 Sibusiso Investments Ltd registered anegative net cash fl ow last year, yet itscash on the balance sheet increased.What could explain this event? 1. The company issued long-termdebt. 2. The company sold some of itsassets. 3. The company repurchased someof its ordinary shares. 4. Statements 1 and 2 are correct. 5. Statements 1 and 3 are correct A fi rm has notes payable of R1 546 000,long-term debt of R and totalinterest expenses of R1 300 000. If thefi rm pays 8% on its long-term debt, whatrate does it pay on its notes payable.? 1. 8.20%. 2. 13.10%. 3. 16.80%. 4. 15.30%. 5. 18.00%. Question 9 Not yet answered Marked out of 1.00 Which of the following is most consistent with effi cient inventory management?The fi rm has a … 1. relatively low ACP 2. relatively high current ratio. 3. below average total assetsturnover ratio. 4. below average inventoryturnover ratio. 5. below average inventoryturnover ratio. Question 10 Not yet answered Marked out of 1.00 Ignoring cost and other effects on thefi rm, which of the following measureswould tend to reduce the cashconversion cycle? 1. Take discounts when offered. 2. Offer longer payment periods tocustomers. 3. Forego discounts that arecurrently being taken. 4. Maintain the same level ofreceivables as sales decrease. 5. Buy more raw materials to takeadvantage of price breaks. Question 11 Not yet answered Marked out of 1.00 What is the fi rm’s marginal profi tcontribution under the proposed plan? The information below applies to thenext three questions. Deals, Inc . currently makes all art saleson credit and offers no cash discount.The fi rm is considering a 3% cashdiscount for payment within 10 days. Thefi rm's current average collection period is90 days, sales are 400 art pieces per yearand selling price is R25 000 per art piece.Variable cost per item is R18 750 and theaverage cost per item is R21 000. Thefi rm expects that the change in creditterms will result in a minor increase insales of 10 items per year, that 75% ofthe sales will take the discount, and theaverage collection period will drop to 30days. The fi rm's bad debt expense isexpected to become negligible under theproposed plan. The bad debt expense iscurrently 0.5% of sales. The fi rm'srequired return on equal-risk investmentsis 20%. Question 11 What is the fi rm’s marginal profi tcontribution under the proposed plan? 1. R 22 500 2. R 40 000 3. R 62 500 4. R100 000 Question 12 Not yet answered Marked out of 1.00 Question 13 Not yet answered Marked out of 1.00 What is the cost of marginal investmentin accounts receivable under theproposed plan? 1. R246 875 2. R276 500 3. R313 460 4. R368 314 What are the savings from marginal baddebts under the proposed plan? 1. R5 000 2. R10 000 3. R50 000 4. R500 000 Question 14 Not yet answered Marked out of 1.00 Question 15 Not yet answered Marked out of 1.00 The credit policy of House and Home Ltdis 2/10 net 30. At present, 25% ofcustomers take advantage of thediscount, 55% pay within the net period,and the remainder pay within 42 days ofthe invoice. What will the effect onreceivables be if all customers take thediscount? 1. no change from the present level 2. higher than the present level 3. lower than the present level 4. cannot be determined. The Taishin Mining Company borrowedR100 000 for one year under a line ofcredit with a stated interest rate of 7.5%and a 15% compensating balance.Normally, the fi rm keeps a balance ofabout R10 000 in its checking account.Based on this information, the effectiveannual interest rate on the loan was … 1. 7.29%. 2. 7.89%. 3. 8.82%. 4. 10.00%. Question 16 Not yet answered Marked out of 1.00 Use the information provided below toanswer questions 16, 17 and 18. Pragmatic Mechanics Ltd hasdetermined the following factors relativeto its asset and fi nancing mix. · The fi rm earns 10% annually on currentassets. · The fi rm earns 20% annually on fi xedassets. · The fi rm pays 13% annually on currentliabilities. · The fi rm pays 17% annually on long-term funds. The fi rm’s current fi xed and total assetrequirements for the last six months ofthe previous year are summarised in thetable below. Question 16 The fi rm’s average seasonal fundsrequirement is approximately equal to … 1. R14 167. 2. R17 500. 3. R85 000. 4. R140 000. Question 17 Not yet answered Marked out of 1.00 Question 18 Not yet answered Marked out of 1.00 The fi rm’s fi nancing costs for this period,according to the aggressive fi nancingstrategy, will approximately be equal to … 1. R12 821. 2. R22 775. 3. R24 475. 4. R26 075. The fi rm’s fi nancing costs for this period,according to the conservative fi nancingstrategy, will approximately be equal to … 1. R11 900. 2. R12 821. 3. R14 875. 4. R21 175. Question 19 Not yet answered Marked out of 1.00 Question 20 Not yet answered Marked out of 1.00 A corporation borrowed R100 000 for sixmonths from the bank at the prime rateplus 2%. At the beginning of the loan, theprime rate was 8.5% but this changed to9% after two months. This was the onlychange. Approximately how muchinterest must this company pay for theperiod (assume 365 days in a year)? 1. R3 616 2. R3 667 3. R5 342 4. R6 411 A fi rm has issued R2 million worth ofcommercial paper that has a 90-daymaturity and sells for R1 900 000. Theapproximate annual interest rate on theissue of commercial paper is … (assume365 days in a year). 1. 5% 2. 10% 3. 21% 4. 23%