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Question
Operating leverage refers toA) financing a portion of the firm's assets with securities bearing a fixed rate of return.
B) the additional chance of insolvency borne by the common shareholder.
C) the incurrence of fixed operating costs in the firm's income stream.
D) a high degree of variable costs of production.
Answer
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Related questions
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The firm's total investment in current assets should be financed with temporary sources of financing.
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Current assets would usually NOT include
A) plant and equipment.
B) marketable securities.
C) accounts receivable.
D) inventories.
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A firm increases the risks of insolvency by keeping relatively large amounts of money tied up in marketable securities.
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a. Calculate the amount Symco must borrow to meets its needs plus the compensating balance.
b. What is the annual percentage rate for this financing?
c. If the bank requires discount interest, what is the annual percentage rate for this financing?
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Dazzly Diamond Corp. called for credit at the Home Alone Bank of Paris, TX. The terms included a $35,000 maximum loan with interest of 1 percent over prime, and the agreement also requires a 15% compensating balance throughout the year. The prime rate is currently 12 percent.
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The Rosewood Corporation established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $500,000 at a rate of 10 percent. A compensating balance averaging 15 percent of the loan is required. Prior to the agreement, Rosewood had maintained an account at the bank averaging $25,000. Any additional funds needed for the compensating balance will also have to be borrowed at the 10 percent rate. If the firm needs $280,000 for 6 months, what is the annual cost of the loan?
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A company that has an unpredictable cash flow, and is holding cash because of things that might happen due to this uncertainty, is holding a larger minimum cash balance due to which type of motive?
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A) risk, investment, and liquidity.
B) transaction, speculative and precautionary.
C) transaction, liquidity, and speculative.
D) transaction, speculative, and risky.
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Cash inflows come from
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B) purchase of fixed assets.
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B) investment portfolios that contain foreign securities.
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D) international trade contracts denominated in the domestic currency.
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A) a savings of $2,800
B) a savings of $2,450
C) additional taxes paid of $2,450
D) a tax savings of $1,400
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A) reduce it by $20,000
B) reduce it by $50,000
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D) reduce it by $15,000
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B) $1,780,000
C) $1,442,000
D) $1,430,000
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J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company's existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. Which of the following statements concerning the change in working capital is MOST accurate?
A) The $4,000 paid for oil is added to the initial outlay, offset by the tax savings $1600.
B) The $4,000 may be expensed each year over the life of the project as part of the incremental free cash flows.
C) The $4,000 is added to the initial outlay and recaptured during the terminal year, hence having no impact on the projects NPV or IRR.
D) Even if the $4,000 is fully recovered at the end of the project, the project's NPV and IRR will be lower if the change in working capital is included in the analysis.
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Your company is considering the replacement of an old delivery van with a new one that is more efficient. The old van cost $40,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 8 years. The old van could be sold today for $7,000. The new van has an invoice price of $80,000, and it will cost $6,000 to modify the van to carry the company's products. Cost savings from use of the new van are expected to be $28,000 per year for 5 years, at which time the van will be sold for its estimated salvage value of $18,000. The new van will be depreciated using the simplified straight-line method over its 5-year useful life. The company's tax rate is 35%. Working capital is expected to increase by $5,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one?
A) $18,875
B) $19,985
C) $22,305
D) $24,220
Q:
A new project is expected to generate $800,000 in revenues, $250,000 in cash operating expenses, and depreciation expense of $150,000 in each year of its 10-year life. The corporation's tax rate is 35%. The project will require an increase in net working capital of $85,000 in year one and a decrease in net working capital of $75,000 in year ten. What is the free cash flow from the project in year one?
A) $298,000
B) $375,000
C) $380,000
D) $410,000
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You are analyzing the purchase of new equipment. Since you are not an expert on this type of equipment, you hire a consulting firm to make recommendations. The consultant charged you $1,500 and recommended the purchase of the latest model from ACME Corp. of America. The equipment costs $80,000, and it will cost another $10,000 to modify it for special use by your firm. The equipment will be depreciated on a straight-line basis over six years with no salvage value. You expect the equipment will be sold after three years for $28,000. Use of the equipment will require an increase in your company's net working capital of $4,000, but this $4,000 will be recovered at the end of year three. The use of the equipment will have no effect on revenues, but it is expected to save the firm $50,000 per year in before-tax operating costs. Your company's marginal tax rate is 35%. What is the initial outlay required to fund this project?
A) $80,000
B) $84,000
C) $90,000
D) $94,000