Question

If there are 16,000,000 shares of common stock available at a par value of $0.15 what is the Common Stock value of all of the firm's shares

		106,666,667
		2,400,000
		1,200,000
		4,800,000

Assuming a purchase of $100 of products, what is the implicit interest rate in the credit terms of 1/2; net 70? Assume a 365 day year.

		1.00%
		2.00%
		3.33%
		5.54%
		Greater than 25%

Champions Inc. consumes cash at a rate of $1,000 per day. Each time they sell securities for cash it costs them $50. The interest rate is 5%. According to the EOQ model, they determine that the optimal amount of cash they should obtain each time they need it is $27,020. Now suppose that two things change. First, interest rates decrease. Second, Champion's bank increases the cost of turning securities into cash. However, they continue, as before, to consume cash at a rate of $1,000 per day. Given this new information, what would you expect to happen to the firm's EOQ?

		EOQ will stay the same
		EOQ will increase or decrease, depending on the size of the changes
		EOQ will most likely go to zero
		EOQ will increase
		EOQ will decrease

Answer 1

1: Option 2

Common stock value = 16000000*0.15 =2400000

2: Option 4

Cost of credit = (Discount%/(1-discount %)) * (365/(Days credit – discount period))

= (1%/99%)*(365/(70-2))

=5.42%

3: Option 4

The EOQ will increase when the cost per order increases and increase if the holding cost (interest rate) decreases.