Question

1) Which of the statements below is​ FALSE?

A. Project A has a higher y−axis intercept for its NPV profile than mutually exclusive Project B. As long as the profile of Project A is above the profile of Project​ B, Project A will have a higher NPV value for that particular discount rate.

B. Project A has a higher y−axis intercept for its NPV profile than mutually exclusive Project B. As we proceed past the crossover rate to the right on the x−​axis, Project​ B's profile will be above Project​ A's profile.

C.Project A has a higher y−axis intercept for its NPV profile than mutually exclusive Project B. This means that Project A has a lower NPV than Project B when the discount rate is zero.

D. Project A and Project B are mutually exclusive. The two projects intersect in terms of NPV at a discount rate labeled the crossover rate

2) One method a company may use to handle a cash shortfall is to draw cash from savings.

A) True

B) False

3) Harris Electronics bills its clients on the first of the month. For​ example, any sale made in the month of July is billed August 1 and is due September 1. Clients traditionally pay as​ follows: 50% by the end of the first month​ August), 40% by the end of the second month​ (September), 8% by the end of the third month​ (October), and​ 2% default on their bills. What is the dollar value of January billings collected in​ April?

First Quarter Sales -Jan $88,000 Feb $74,000 March $96,000

Second Quarter Sales - April $99,000 May $82,000 June $63,000

A. $29,600

B.$0.00

C.$7,040

D.​$5,920

4) In terms of the​ float, the buyer of a product wants to​ ________ and the seller wants to​ ________.

A. increase the collection​ float; decrease the disbursement float

B. increase the disbursement​ float; decrease the collection float

C. decrease the collection​ float; decrease the disbursement float

D. decrease the disbursement​ float; decrease the collection float

5) Pacific Automotive has a​ $250,000 compensating balance loan with its bank. The terms of the loan call for Pacific to keep​ 10% of the loan as a compensating balance and pay interest at an annual rate of​ 6.50% on the entire amount. If the firm borrows the maximum amount for one​ year, what is the EAR on this​ loan?

A. ​6.50%

B. ​7.39%

C. ​7.22%

D. 6.87%

6) Bestor Bookkeeping has a​ $150,000 compensating balance loan with its bank. The terms of the loan call for Bestor to keep​ 8% of the loan as a compensating balance and pay interest at an annual rate of​ 7.50% on the entire amount. If the firm borrows the maximum amount for one​ year, what is the EAR on this​ loan?

A. ​8.15%

B. ​7.50%

C. ​8.67%

D. 8.35%

7) New York Investments​ (NYI), an investment banking​ firm, has proposed two types of payment plans for the IPO being considered by Albany Exploration. The first is a firm commitment of​ $40,000,000. The second is a best efforts arrangement in which NYI will receive​ $2.00 for every share sold up to a maximum of​ $3,600,000 for the​ 1,800,000 shares being offered. How much money will NYI earn under the firm commitment method if it is able to sell only​ 95% of the offering at a price of​ $25.00 per​ share?

a) $800,000

b) $1,080,000

c) $2,750,000

d) $2,200,000

7) Pacific Motors Inc. plans to issue​ $3,000,000 of commercial paper with a

6−month maturity at​ 98% of par value. What is the​ EAR?

A.​4.08%

B.​4.12%

C.​4.00%

D.2.00%

8) ​Often, in​ bankruptcy, the current managers continue to run the business while it operates under the reorganization​ plan, but the court may also appoint a trustee to oversee the operations and protect the rights of the claimants during this period of time.

True

False

Answer 1

1) Solution: Project A has a higher y−axis intercept for its NPV profile than mutually exclusive Project B. This means that Project A has a lower NPV than Project B when the discount rate is zero.

Explanation: The discount rate of zero does not indicates that the Project A has a lower NPV than Project B

2) Solution: True

Explanation: To handle the cash drawback a company may withdraw cash from saving

3) Solution: $7,040

Explanation: 8% of January sales are collected in april = 88,000 * 0.08 = 7,040

4) Solution: increase the disbursement​ float; decrease the collection float

Explanation: In terms of the​ float, the good's buyer wants to​ increase the disbursement​ float; decrease the collection float

7) Solution: 4.12%

Working:

Six month interest rate = Interest due / Discounted amount = (300,000 * (1-0.98)) / (300,000 * 0.98) = 0.0200408

EAR = (1 + Periodic rate) m - 1 = 1.0200408 - 1 = .0.41233 or 4.12%