Financial and Managerial Accounting Midterm Solutions, Exams of Advanced Accounting

Download Financial and Managerial Accounting Midterm Solutions and more Exams Advanced Accounting in PDF only on Docsity! ACCO 220 midterm Solutions to practice questions Financial and Managerial Accounting (Concordia University) lOMoAR cPSD|10754654 SOLUTIONS Practice questions Multiple Choice 1. XYZ has $25,000 of debt outstanding and a book value of equity of $25,000. The company has 10,000 shares outstanding and a stock price of $10. If the unlevered beta is 0.75 and the marginal tax rate is 20%, what is XYZ's levered beta? a. 0.75 b. 0.8 c. 0.85 D. 0.9 Market value of equity = 10,000 x $10 = $100,000; βL = 0.75[1+(1-0.2)($25,000/$100,000)] 2. The Collection Co. has a current beta of 1.6. The market risk premium is 7 percent and the risk- free rate of return is 3 percent. By how much will the cost of equity increase if the company expands their operations such that their company beta rises to 1.9? a. 0.30 percent b. 0.90 percent c. 1.50 percent D. 2.10 percent e. 2.70 percent Current cost of equity = 3+1.6(7) = 14.2% New cost of equity = 3+1.9(7) = 16.3% Change in cost of equity = 16.3 – 14.2 = 2.1 3. Blue Ribbon, Inc. wants to have a weighted average cost of capital of 10 percent. The firm has an aftertax cost of debt of 4 percent and a cost of equity of 12 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital? a. .25 B. .33 c. .50 d. .67 e. .75 .10 = [We .12] + [(1 We) .04) .10 = .12We + .04 .04We .06 = .08We We =.75 Wd = 1 We = 1 .75 = .25 Debt-equity ratio = .25 / .75 = .33 Page 1 of 7 lOMoAR cPSD|10754654 SOLUTIONS 11. Back Woods Coffee has expected earnings before interest and taxes of $34,500, an unlevered cost of capital of 14 percent, and debt with both a book and face value of $20,000. The debt has an annual 7 percent coupon. The tax rate is 35 percent. What is the value of the firm? A. $167,179 b. $174,015 c. $177,778 d. $203,518 e. $241,414 VU = [$34,500 (1 .35)] / .14 = $160,178.57 VL = $160,178.57 + (.35 $20,000) = $167,179 12. A firm has a market value equal to its book value. Currently, the firm has excess cash of $800 and other assets of $4,200. Equity is worth $5,000. The firm has 200 shares of stock outstanding and net income of $350. What will the new earnings per share be if the firm uses all its excess cash to complete a stock repurchase? a. $1.51 b. $1.75 c. $1.96 d. $2.00 E. $2.08 Price per share = $5,000 / 200 = $25 Number of shares repurchased = $800 / $25 = 32 shares New EPS = $350 / (200 32) = $2.08 13. A firm has a market value equal to its book value. Currently, the firm has excess cash of $2,000 and other assets of $13,000. Equity is worth $15,000. The firm has 1,000 shares of stock outstanding and net income of $2,500. By what percent does the stock price per share change if the firm pays out its excess cash as a cash dividend? a. 16.67 percent B. 13.33 percent c. 0.00 percent d. 13.33 percent e. 16.67 percent Price per share before cash dividend = $15,000 / 1,000 = $15 Price per share after cash dividend = ($15,000 $2,000) / 1,000 = $13 Percentage change in price = ($13 $15) / $15 = .1333 = 13.33 percent Page 4 of 7 lOMoAR cPSD|10754654 SOLUTIONS 14. Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. a. using cash to pay an accounts payable b. using cash to pay a long-term debt C. selling inventory at a profit d. collecting an accounts receivable e. granting a customer a discount for early payment 15. Which of the following are sources of cash? I. reducing the level of inventory II. receiving a payment from a customer III. selling additional equity shares IV. retiring bonds a. I and III only b. I and IV only c. II and III only D. I, II, and III only e. I, III, and IV only 16. Which of the following will increase the operating cycle? I. increasing the inventory turnover rate II. increasing the payables period III. decreasing the receivable turnover rate IV. decreasing the inventory level a. I only B. III only c. II and IV only d. I and IV only e. II and III only Page 5 of 7 lOMoAR cPSD|10754654 SOLUTIONS 17. Center Enterprises currently has an operating cycle of 58 days. You are analyzing some operational changes which are expected to increase the accounts receivable period by 4 days and decrease the inventory period by 3 days. The accounts payable turnover rate is expected to increase from 9 to 12 times per year. If all of these changes are adopted, what will Center's new operating cycle be? a. 56 days b. 57 days C. 59 days d. 60 days e. 65 days Operating cycle = 58 + 4 3 = 59 days 18. Evans, Inc. has an inventory period of 36 days, an accounts payable period of 44 days, and an accounts receivable turnover rate of 20. What is the length of the cash cycle? A. 10.25 days b. 12.00 days c. 26.25 days d. 60.00 days e. 61.75 days Cash cycle = (365 / 20) + 36 44 = 10.25 days 19. Wyler, Inc. has a beginning cash balance of $380 on March 1. The firm has projected sales of $550 in February, $700 in March, and $800 in April. The cost of goods sold is equal to 75 percent of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 15 days. The firm has monthly cash expenses of $200. What is the projected ending cash balance at the end of March? Assume that every month has 30 days. a. $205.00 B. $280.00 c. $317.50 d. $392.50 e. $430.00 March collections = [(15 / 30) $550] + [(15 / 30) $700] = $625; March disbursements for payables = .75 $700 = $525; March ending cash balance = $380 + $625 $525 $200 = $280 Page 6 of 7