Which of the following is a correct statement?

a. Inventory is not part of the current assets because they are physical innature.

b. Plant, equipment, building and land are non-current assets, but not fixedassets.

c. Marketable securities such as stocks & bonds are current assets.

d. Cash is the only liquid asset.

e. Physical assets are finance by equity only.

2. Which of the following is an incorrect statement?

a. Revenue – Operating Income = Gross Marginb. Revenue = Price

 Q’ty sold or TR = P*Q

c. EAT = EBT – Taxesd.

d.Income – Expenses = Operating Income

e. Revenue – CGS = Gross Profit

3. Expenses can be categorized by whether the cost incurred is directly related toproduction or not. Which of the following is correct?

a. If directly related, it will not change with the production level, thus calledFixed Cost.

b. If directly related, it will change with the production level, thus calledFixed Cost.c. If not directly related, it will not change with the production level, thuscalled Variable Cost.d. If not directly related, it will change with the production level, thus calledVariable Cost.e. None of the above is a correct statement.4. Which of the following is an incorrect statement?a. Income – Expenses = Operating Incomeb. Current Assets – Current Liabilities = Net Working Capitalc. Net Profit = EBT – Taxesd. Operating Income – Interest PMT = Gross Profite. Expenses = CGS + Operating Expenses5. Which item of the income statement represents the taxable income of the firm?a. EBIT b. Operating Income c. EBT d. CGS e. EAT6. Which of the following is a correct interpretation of “r = i – ”?a. Nominal interest rate is real interest rate adjusted for inflation.b. Real interest rate is inflation adjusted for nominal interest rate.c. Inflation is real interest rate adjusted for nominal interest rate.d. Negative real interest rate is possible.e. Negative real interest rate is favorable to the lenders.7. Which of the following is not a correct statement?a. Accounts receivable represents credit sale, and thus, cannot be collecteduntil maturity.b. Accounts receivable mainly consists of promissory notes and credit sales.c. Accounts receivable is part of the current assets.FNB100 Midterm2d. Accounts payable mainly consists of purchase of inventory on credit andnotes payable.e. Accounts payable is part of the current liabilities.8. Which of the following is not a correct statement?a. When promissory notes are factored, the full face value is not redeemed.b. Accounts receivable are discounted in the same way as promissory notes.c. When accounts receivable are factored, invoices are irrelevant.d. Promissory notes are a type of commercial paper.e. Commercial paper is a short-term corporate debt.9. Which of the following is not a correct statement?a. ST US gov’t debt instrument is called Treasury bill.b. LT US gov’t debt instrument includes Treasury note with maturity up to10 years and Treasury bond with maturity up to 30 years.c. ST refers to maturity up to 3 years.d. LT corporate debt instrument is called corporate bond.e. Bond is the term for LT debt instruments in general.10. Which of the following is not a correct statement about the bond?a. Bond can be either non-interest-bearing or interest-bearing.b. Non-interest-bearing bonds sell at discount upon issuance.c. Price of a discount bond will go up as it approaches maturity.d. There is an inverse relation between the bond price and interest rate.e. Baseline interest rate for the bond market is LIBOR rate.

 

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1. Issuing new stock or borrowing from a bank is a cash inflow. ( )

2. Since inventory may be held for more than a year, it is not a current asset. ( )

3. Retained earnings represent cash. ( )

4. An increase in accounts payable is cash outflow. ( )

5. Assets + Equity = Liabilities. ( )

6. LT debt that matures in this fiscal year is classified as a current liability. ( )

7. Interest & dividends are paid before income taxes. ( )

8. BV may not represent what the firm is worth. ( )

9. Inventory consists of raw materials, work-in-process, and finished goods. ( )

10. An increase in retained earnings is a cash inflow. ( )

11. Quick ratio cannot > current ratio. ( )

12. If the -interest-earned were 1.5, interest payments will not be made. ( )

13. If inventory is sold for cash, the quick ratio rises. ( )

14. If a firm issues LT debt and uses the proceeds to retire ST debt, the current ratio is unaffected. ( )

15. A rapid inventory turnover may imply lost sales due to the firm being out of the item. ( )

16. The more rapidly the inventory turns over, the more finance the firm needs.( )

17. Leverage ratios indicate the extent to which the firm owns plant & equipment financed by debt. ( )

18. If the firm has a large amount of debt financing, it is highly leveraged. ( )

19. If the D/TA ratio is 50%, then the D/E ratio is 1:1. ( )

20. If a firm has a high usage of operating leverage, it has few fixed expenses. ( )

21. Railroads have a greater usage of operating leverage than banks. ( )

22. An increase in fixed costs will tend to reduce risk since more of the firm’s cost are known and cannot be changed. ( )

23. BE analysis does not indicate the output that maximizes the value of the firm.

( )

24. TR = PQ. ( )

25. If a firm has FC of $3K, the P=$4, and AVC=$1, the QBE=1,000 units. ( )

26. TR = .5Q implies that the P is constant. ( )

27. An increase in the debt ratio may be associated with an increase in risk. ( )

28. A firm would prefer to issue preferred stock instead of debt since it increases the usage of financial leverage. ( )

29. Since high use of financial leverage is associated with less risk, higher financial leverage may also result in higher stock prices. ( )

30. The effect on EPS will be the same if a firm issues bonds with a 9% int or preferred stock with a 9% div yield. ( )

31. A recession will cause earnings to fall more rapidly for less financially leveraged firms. ( )

32. The lower a firm’s tax rate, the smaller is the incentive to use preferred stock instead of debt financing. ( )

33. Because interest is tax-deductible, the effective cost of debt is 2

34. Business risk refers to

a. use of accelerated depreciation

b. the risk inherent in the nature of the business

c. profitability

d. the sources of the firm’s finances

35. Successful use of financial leverage may

a. increase the firm’s EPS

b. decrease the firm’s EPS

c. decrease the investor’s ROI

d. none of the above

36. The effective cost of debt is reduced because

a. interest is a tax-deductible expense

b. interest is not a tax-deductible expense

c. interest is paid before preferred dividends

d. interest is paid after common stock dividends

37. Debt financing is more risky for firms than preferred stock financing because

a. preferred dividend payments are legal obligations

b. interest payments are legal obligations

c. preferred stock must be retired

d. debt need not be refinanced

38. The use of financial leverage

a. alters operating leverage

b. magnifies the impact of changes in sales on operations

c. magnifies changes in operating income relative to changes in revenue

d. implies the volatility of net income is increased

39. The cost of K is

a. > the cost of debt and equity

b. > the cost of debt but c. d. the cost of equity

40. Flotation costs of issuing new securities

a. decreases the cost of K

b. encourage the retention of earnings

c. encourage external financing

d. do not affect the cost of K

e. the firm’s inventory cost

 

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FlyAway Airways

Wesley Shocker, research analyst for FlyAway Airways, was asked by the director of research to make recommendations regarding the best approach for monitoring the quality of service provided by the airline.15 FlyAway Airways is a national air carrier that has a comprehensive route structure consisting of long-haul, coast-to-coast routes and direct, nonstop routes between short-haul metropolitan areas. Current competitors include Midway and Alaska Airlines. FlyAway Airlines is poised to surpass the billion-dollar revenue level required to be designated as a major airline. This change in status brings a new set of competitors. To prepare for this move up in competitive status, Shocker was asked to review the options available for monitoring the quality of FlyAway Airways service and the service of its competitors. Such monitoring would involve better understanding the nature of service quality and the ways in which quality can be tracked for airlines. After some investigation, Shocker discovered two basic approaches to measuring quality of airline service that can produce similar ranking results. His report must outline the important aspects to consider in measuring quality as well as the critical points of difference and similarity between the two approaches to measuring quality

Some Background on Quality

In today’s competitive airline industry, it’s crucial that an airline do all it can do to attract and retain customers. One of the best ways to do this is by offering quality service to consumers. Perceptions of service quality vary from person to person, but an enduring element of service quality is the consistent achievement of customer satisfaction. For customers to perceive an airline as offering quality service, they must be satisfied, and that usually means receiving a service outcome that is equal to or greater than what they expected. An airline consumer usually is concerned most with issues of schedule, destination, and price when choosing an airline. Given that most airlines have competition in each of these areas, other factors that relate to quality become important to the customer when making a choice between airlines. Both subjective aspects of quality (that is, food, pleasant employees, and so forth) and objective aspects (that is, on-time performance, safety, lost baggage, and so forth) have real meaning to consumers. These secondary factors may not be as critical as schedule, destination, and price, but they do affect quality judgments of the customer. There are many possible combinations of subjective and objective aspects that could influence a customer’s perception of quality at different times. Fortunately, since 1988, consumers of airline services have had access to objective information from the Department of Transportation regarding service performance in some basiccategories. Unfortunately, the average consumer is most likely unaware of or uninterested in these data on performance; instead, consumers rely on personal experience and subjective opinion to judge quality of service. Periodic surveys of subjective consumer opinion regarding airline service experience are available through several sources. These efforts rely on contact with a sample of consumers who may or may not have informed opinions regarding the quality of airline service for all airlines being compared.

A Consumer Survey Approach

In his research, Shocker discovered a recent study conducted to identify favorite airlines of frequent fliers. This study is typical of the survey-based, infrequent (usually only annually), subjective efforts conducted to assess airline quality. A New York firm, Research & Forecasts, Inc., published results of a consumer survey of frequent fliers that used several criteria to rate domestic and international airlines. Criteria included comfort, service, reliability, food quality, cost, delays, routes served, safety, and frequent-flier plans. The questionnaire was sent to 25,000 frequent fliers. The 4,462 people who responded were characterized as predominantly male (59 percent) professional managers (66 percent) whose average age was 45 and who traveled an average of at least 43 nights a year for both business and pleasure. This group indicated that the most important factors in choosing an airline were 1) route structure (46 percent), 2) price (42 percent), 3) reliability (41 percent), 4) service (33 percent), 5) safety (33 percent), 6) frequent-flier plans (33 percent), and 7) food (12 percent). When asked to rate twenty different airlines, respondents provided the rankings in Case Exhibit 13.1–1.

A Weighted Average Approach

Shocker also discovered a newer, more objective approach to measuring airline quality in a study recently published by the National Institute for Aviation Research at the Wichita State University in Wichita, Kansas. The Airline Quality Rating (AQR) is a weighted average of 19 factors that have relevance when judging the quality of airline services (see Case Exhibit 13.2–2). The AQR is based on data that are readily obtainable (most of the data are updated monthly) from published sources for each major airline operating in the United States. Regularly published data on such factors as consumer complaints, on-time performance, accidents, number of aircraft, and financial performance are available from the Department of Transportation, the National Transportation Safety Board, Moody’s Bond Record, industry trade publications, and annual reports of individual airlines.

To establish the 19 weighted factors, an opinion survey was conducted with a group of 65 experts in the aviation field. These experts included representatives of most major airlines, air travel experts, Federal Aviation Administration (FAA) representatives, academic researchers, airline manufacturing and support firms, and individual consumers. Each expert was asked to rate the importance that each individual factor might have to a consumer of airline services using a scale of 0 (no importance) to 10 (great importance). The average importance ratings for each of the 19 factors were then used as the weights for those factors in the AQR. Case Exhibit 13.1–2 shows the factors included in the Airline Quality Rating, the weight associated with each factor, and whether the factor has a positive or negative impact on quality from the consumer’s perspective. Using the Airline Quality Rating formula and recent data, produce AQR scores and rankings for the 10 major U.S. airlines shown in Case Exhibit 13.1–3.

What Course to Chart?

Shocker has discovered what appear to be two different approaches to measuring quality of airlines. One relies on direct consumer opinion and is mostly subjective in its approach to quality and the elements considered. The other relies on performance data that are available through public sources and appear to be more objective. Both approaches incorporate pertinent elements that could be used by consumers to judge the quality of an airline. Shocker’s recommendation must consider the comprehensiveness and usefulness of these approaches for FlyAway Airways as it moves into a more competitive environment. What course of action should he recommend?

Questions

1. How comparable are the two different methods? In what ways are they similar? In what ways are they different?

2. What are the positive and negative aspects of each approach that Shocker should consider before recommending a course of action for FlyAway Airways?

3. What aspects of service quality does each approach address well and not so well?

4. Considering the two methods outlined, what types of validity would you consider to be demonstrated by the two approaches to measuring quality? Defend your position.

5. Which of the methods should Shocker recommend? Why?

 

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fo r a new product, sales volume in the first year is estimated to be 80000 units and is projected to grow at a rate of 4% per year. teh selling price is $12 and will increase by $0.50 each year. Per unit variable costs are $3 and annual fixed costs are $400000. Per unit costs are expected to increase 5% per year. Fixed costs are expected to increase 8% per year. Develop a spreadsheet model to calculate the net present value of profit over a 3 yr period, assuming a 4% discount rate

 

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focus on the company’s profitability ratios. Profitability ratios are very important to investors. Companies often use these ratios when evaluating its managers.  (References are to be used to collect information on the selected company, please include a citation) 

 

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