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Exam 22: Managing the Firms Assets

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Question 51

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A firm will have difficulty attracting investors if investments in the firm have internal rates of return below an investor's required rate of return.

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Question 52

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If the internal rate of return is less than the firm's cost of capital, the project should be accepted because capital for the project can be obtained more cheaply than usual.

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Question 53

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Discounted cash flow techniques take into consideration that cash received today is more valuable than cash received at a later date.

You Make the Call-Situation 2 Ruston Manufacturing Company is a small firm selling entirely on a credit basis. It has experienced successful operation and earned modest profits. Sales are made on the basis of net payment in 30 days. Collections from customers run approximately 70 percent in 30 days, 20 percent in 60 days, 7 percent in 90 days, and 3 percent bad debts. The owner has considered the possibility of offering a cash discount for early payment. However, the practice seems costly and possibly unnecessary. As the owner puts it, "Why should I bribe customers to pay what they legally owe?"

During the cash conversion period, the firm no longer has the benefit of the financing provided by the supplier.

Average annual after-tax profits per year divided by the average book value of the investment equals

Granting credit to customers

Accounting profits are not identical to actual cash flows.

Although the owner of a small business does not make long-term investment decisions often, capital budgeting is nonetheless important to the successful operation of the firm.

The accounting return on investment technique compares the average before tax profits a firm expects to receive with the average book value of the investment.

Working-capital management

You Make the Call-Situation 3 Adrian Fudge of the Fudge Corporation wants you to forecast its financing needs over the fourth quarter (October-December). He has made the following observations relative to planned cash receipts and disbursements:

List the three techniques for making capital budgeting decisions discussed in the chapter. Which incorporate the time value of money?

Compare the two investment proposals below, using the payback period method. The projected cost of each investment proposal is $100,000.

The payback period technique deals with accounting profits in measuring how long it will take to recover the initial cash outlay of an investment.

Wilbur is attempting to raise some quick cash for his business by selling its accounts receivable to a finance company, this is called

Discuss the working-capital cycle of a small business.

In using the net present value method, one does not consider the time value of money.

Which of the following questions do all types of capital budgeting techniques try to answer?

The cash conversion period is the time between