Exam 12: Risk, Return, and Capital Budgeting

Smith Corp.produces a product that generates repeat orders on an annual basis.The product has a current price of $2,500 and a current cost of $2,100.The company uses a 15% opportunity cost of capital.Due to the product's high cost,there is a 17% chance that each new customer will default on payment.If the customer does not default,then business from that customer forms an infinite annuity income stream.What is the expected profit and break-even probability from granting credit under these conditions?

Which of the following would not be included in inventory carrying cost?

If the marginal reduction in order costs exceeds the marginal carrying cost of inventory,then:

Which of the following would not be considered a money market instrument?

According to credit experts,a full credit analysis should be conducted:

What are the popular tactics for increasing net float?

Which of the following is not an accepted method of attempting to increase a firm's net float?

An aging schedule illustrates the relationship between:

Preauthorized payments allow customers to:

Which of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts,based on terms of sale of 5/15,net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

Which of the following financial ratios has the highest weight in Altman's Z-score estimation?

In order to maintain a zero-balance account,a firm transfers all collections to a single account.

Small face-to-face purchases are commonly paid for in cash.What are some other ways that you can pay your bills?

What effective interest rate is charged to a purchaser receiving terms of 5/10,net 90 if the purchaser avoids the discount and pays in 90 days?

A retailer buys Christmas merchandize from the manufacturer on September 1.The manufacturer postdates the invoice to December 31,and the credit terms of the sale are 2/10,net 30.When is the payment due?

The economic order quantity:

What is the break-even probability in the following case? A customer wishes to purchase a $2,000 item that has been marked up 50% over cost and the probability of collection is only 65%.Assume all cash flows are discounted to present value.

Since defaults can be costly,it is cost-effective to undertake a full credit analysis of all customers.

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4?