IMANET CMA Exam Dumps

The higher the dividend-payout ratio, the sooner retained earnings are exhausted and the company must seek external financing. Assuming the same investments are undertaken, the result is a higher marginal cost of capital because lower-cost capital sources will be used up earlier.

The cost of carrying receivables equals average receivables times the variable cost ratio times the cost of money. Given sales of $45,000,000, regardless of which collection procedures are applied, the average daily sales must be $125,000 ($45,000,000 + 360 days). The increase in the average receivables balance is therefore $625,000 (5 days x $125,000). Given an additional $625,000 of receivables, the compass additional required investment in receivables is $375,000 ($625,000 x 60% variable cost ratio), and the incremental pretax cost of this investment is $22,500 (6% x $375,000). Accordingly, the collection costs must be reduced by a pretax minimum of $22,500 to offset the cost of the increased investment in receivables.

Systematic evaluation of the trade-offs between product functionality and product cost while still satisfying customer needs is the definition of value engineering.

To maintain a capital structure of 40% debt and 60% equity, the $7 million total must consist of $2.8 million of debt and $4.2 million of equity. The equity will consist of $3 million of retained earnings and $1.2 million of new stock. The weighted-average cost of the three sources of new capital is determined as follows:

$3,000000 + $7000,000 x 14% = 6.00%

$1,200,000 $7,000,000 x 16% = 214%

$2,800,000 + $7,000,000 x 10% = 4.00%

12.74%

The FLF Corporation is preparing to evaluate capital expenditure proposals for the coming year. Because the firm employs discounted cash flow methods, the cost of capital for the firm must be estimated. The following information for FLF Corporation is provided:

A conservative working capital policy results in an increase in working capital (current assets --- current liabilities). It is typified by a reduction in liquidity risk. Increasing the current ratio, whether by decreasing current liabilities or increasing current assets1 minimizes the risk that the company will not be able to meet its obligations as they fall due. Thus, an increasing ratio of current to concurrent assets means that a company is forgoing the potentially higher returns on long-term assets in order to guard against shortterm cash flow problems.