Cook - 5200 Final Spring Two 2018.doc

Cook - 5200 Final Spring Two 2018.doc - 1 Final Spring 2018...

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Final Spring 2018 Business Finance NAME Julia Cook Open Book and Notes. There are 25 plus one bonus question. YOU MAY OMIT ONE OF YOUR CHOICE!!!!!!!!!!!!!!!!!!! 1. Understand and distinguish between mutually exclusive and independent projects. Independent projects are projects whose cash flows are not affected by one another, so the acceptance of one project does not affect the acceptance of the other project(s). All independent projects can be purchased if they are all acceptable. Mutually exclusive projects are a set of projects in which the acceptance of one project means the others cannot be accepted. Only one mutually exclusive project can be purchased, even if they are acceptable. 2. Why are companies tempted to issue (sell) debt, versus stock, to raise new capital? When companies issue stock, they grant proportional ownership in the firm to investors in exchange for money. The advantage for stock issuance is that the money generated from the sale of stock does not need to be repaid. There are, however, downsides to stock issuance that may make bonds the more attractive proposition. With bonds, companies that need to raise money can continue to issue new bonds as long as they can find investors willing to act as lenders. The issuance of new bonds has no effect on ownership of the company or how the company is operated. Stock issuance, on the other hand, puts additional stock shares in circulation, which means that future earnings must be shared among a larger pool of investors. This can result in a decrease in earnings per share (EPS), putting less money in owners' pockets. 3. Information for an EOQ problem: Annual sales (in units) 1,500,000 Ordering Costs $150 Inventory Cost of each unit is $50 Inventory Carrying Cost as a percentage is 20% of Inventory Cost Lead time for new orders to arrive at our plant is 3 weeks. Our policy is to always keep a safety stock of 1 week’s supply. C = carrying costs as a percentage = 20% PP = purchase price/price per unit = $50 Q = number of units purchased with each order T = total demand = 1,500,000 1
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O = fixed costs per order = $150 EOQ = = √(2x150x1,500,000)÷(.20x50) = 6,708.2 What is the EOQ = 6,708 units What is the Reorder Point = units (when do we reorder?) 1,500,000 / 52 = 28,846 units per week x 3 weeks order lead time = 86,538 units What is the Safety stock in units = 28,846 units 4. Information for Break Even Point problem: Fixed Costs $550,000 annually Selling price of each unit 25 Variable Cost for each unit $10 How many units must be sold to reach the Break Even Point? 36,667 units Break Even Point = Fixed Costs / (Sales Price per Unit – Variable Cost per Unit) 550,000/(25-10) = 36,667 units 5. Understand the concept of Capital Rationing and how it impacts on the Capital Budget for a company Capital rationing is the act of placing restrictions on the amount of new investments or projects that a company may undertake. The combination of projects with the highest total net present value (NPV) are accepted by the company. The goal of capital rationing is to ensure that the company does not over invest in assets. Capital rationing affects a company’s bottom line and dictates the amount it can pay out in dividends.
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