1-2021 FINMNN1 - 6 - WC and FD Problem

Assessment
BBCDBYES BADDBNO
Frisch Fish Corp expects net income next year to be $600,000. Inventory and
accounts receivable will have to be increased by $300,000 to accommodate this sales
level. Frisch will pay dividends of $400,000. How much external financing will Frisch
Fish need assuming no organically generated increase in liabilities? *
3 points

A. No external financing is required.

B. $100,000
C. $200,000
D. $300,000

Samuelson will produce 20,000 units in January using level production. If each unit
costs $500 to manufacture, what is the dollar value of ending inventory in January if
beginning inventory is 10,000 units and January sales are 15,000? *
3 points

A. less than $5,000,000.

B. between $5,000,000 and $10,000,000.
C. greater than $10,000,000.
D. there will be a shortage.

Under normal conditions (70% probability), Plan A will produce $40,000 higher return
than Plan B. Under tight money conditions (30% probability), Plan A will produce
$100,000 less than Plan B. What is the expected value of returns? *
3 points

A. $28,000
B. ($30,000)
C. $58,000
D. ($2,000)

Hicks Health Clubs, Inc., expects to generate an annual EBIT of $500,000 and needs
to obtain financing for $1,000,000 of assets. Their tax bracket is 40%. If the firm goes
with a short-term financing plan, their rate will be 8 percent, and with a long-term
financing plan their rate will be 9 percent. What much more or less will their initial
annual earnings after taxes be if they choose the most aggressive financing plan? *
3 points

A. $10,000
B. ($10,000)
C. ($6,000)
D. $6,000

Riley Co. is considering a short-term or long-term financing plan for $6,000,000 in

assets. They expect the following 1 year rates over the next 3 years: 7%, 9%, and
12%. Their long-term interest rate will be 9% for the 3 years. Assuming the rates
follow their expectations, what will be the difference in interest costs over the 3
years? *
3 points

A. Long-term interest will be $60,000 more than short-term interest

B. Long-term interest will be $60,000 less than short-term interest
C. Long-term interest will be $1,140,00 less than short-term interest
D. None of these

King, Inc., a successful Midwest firm, is considering opening a branch office on the
west coast. Under normal economic conditions, with a 45% probability of occurring,
King can expect to earn a net income of $50,000 per year. In a mini-recession, at 25%
probability, King will earn $20,000. In a severe recession, at a 20% probability, King
will lose $10,000. There is also a slight probability (10%) that King will lose $300,000 if
the expansion fails and the branch office must be closed. Should King open a branch
office in California based on these assumptions? *
5 points

Yes
No