Question

It is January 2nd and senior leadership at the Jasper Corporation meets to determine their investment plan for the year. The team decides to fully fund an equipment purchase by issuing 50,000 shares of stock plus a new bond issue. The CFO happily notes this will raise their leverage (Assets/Equity) to a new target of 3.63. Assume the stock can be issued at yesterday's stock price of $35.20. Which of the following statements is accurate?

1. Jasper Corporation's long term debt will increase from $7,571,890.58 to $9,331,891.00
2. Total investment for Jasper Corporation will be $4,624,073.15
3. Jasper Corporation will issue stock totaling $1,760,000.00
4. Jasper Corporation's bond issue will be $81,365.71
5. None of the above

A company has a higher asset turnover rate than its peers. Which of the following characteristics would not be able to contribute to this higher ratio?

1. Their use of debt is increasing their EBITD
2. A unique incentive system helps them get better sales people and keep them.
3. Their stores sell more product per square foot of store in dollars.
4. Their brand power allows them to charge a higher price per unit.
5. They have fewer assets than their peers.

Which of the following makes it harder for a company to increase the amount of debt in their capital structure?

1. A large amount of tangible assets
2. Very consistent revenues from month to month
3. Relatively high fixed costs
4. Pricing power through product differentiation
5. An oligopolistic competitive market structure

What allows suppliers to be powerful in an industry?

1. When there are many suppliers
2. When plenty of satisfactory substitutes are available
3. When they can forward integrate into the industry
4. When they sell an undifferentiated product

Lou’s Air Conditioning is a family-owned organization operating in Florida. Which of the following indicates that it is an efficient organization?

1. It operates at the lowest possible cost while improving annual output
2. It operates in ten counties in the state
3. It has the highest customer satisfaction score on Yelp
4. It emphasizes diversity in hiring

Answer 1

1) C. Jasper Corporation will issue stock totaling $1,760,000.00

Total value of stock issued = No of shares issued x Price per share

= 50000 x 35.2

= $1,760,000

2) A. Their use of debt is increasing their EBITD

Asset turnover ratio = sales/Total asset

Thus any factor that increases sales , will contribute to increase in asset turnover ratio

Use of debt to increase EBIRD will increase profit but not sales

3) C. Relatively high fixed costs

Relatively higher fixed cost makes its difficult for the company to add debt as debt entails interest payments which is fixed in nature and will add more burden to the company

4) C. When they can forward integrate into the industry

When there are many suppliers or subsitutues available supllier looses their bargaining power. However if supplier can forward integrate into industry means they use their own product to make final unit , then the can be powerful as cost to manufacturing final unit will be lower as compared to others

5) A. It operates at the lowest possible cost while improving annual output

Efficiency is defined as to achieve something with minium efforts. Thus Operating at the lowest possible cost while improving annual output can be said efficiency of the organization