Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Chapter 15, Problem 10DQ
To determine
Explain if the manager should purchase or lease expensive equipment.
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An analyst at a company notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt.Â
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How do you balance the amount of equity and debt? Explain the significance of maintaining the ability to increase borrowing capacity for a company with a lower cost of debt compared to equity. How does this impact project evaluation and investment decisions, and what role does the concept of cost of capital play in such considerations?
A company uses a financial instrument for bridge financing. The instrument here is short term, low risk, unsecured and highly liquid. It needed to buy machinery for which it issued equity. This turned out to be expensive as this issue involved floatation costs. The company is large and has good creditworthy and this method has come up as a great help to it.
Based on the above case study, answer the following:
Which financial instrument is indicated in the above case?
Which type of instrument is this?
Name the types of floatation costs which are generally involved?
How has this method helped the company?
Name 2 money market instruments which are issued at discount and redeemed at par.
Your firm faces relatively lower carrying costs and relatively higher shortage costs.
Additionally, your firm takes on a higher amount of long-term financing and invests
the excess into marketable securities. Which of the following statements is true?
With regard to the level of investment in current assets, your firm has
a restrictive policy. With regard to the financing of the current assets, your firm
has a flexible policy.
With regard to both the level of investment in current assets and the financing
of the current assets, your firm has a relatively flexible policy.
With regard to the level of investment in current assets, your firm has a flexible
policy. With regard to the financing of the current assets, your firm has a
restrictive policy.
With regard to both the level of investment in current assets and the financing
of the current assets, your firm has a relatively restrictive policy.
Chapter 15 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 15 - Name the two major types of financial statement...Ch. 15 - Prob. 2DQCh. 15 - Explain how creditors, investors, and managers can...Ch. 15 - What are liquidity ratios? Leverage ratios?...Ch. 15 - Prob. 5DQCh. 15 - Prob. 6DQCh. 15 - Prob. 7DQCh. 15 - A high inventory turnover ratio provides evidence...Ch. 15 - A loan agreement between a bank and a customer...Ch. 15 - Prob. 10DQ
Ch. 15 - Explain why an investor would be interested in a...Ch. 15 - Prob. 12DQCh. 15 - Prob. 13DQCh. 15 - When a company participates in a stock buyback...Ch. 15 - Explain the significance of the inventory turnover...Ch. 15 - In a JIT manufacturing environment, the current...Ch. 15 - Prob. 1MCQCh. 15 - Prob. 2MCQCh. 15 - Fractions or percentages computed by dividing one...Ch. 15 - Prob. 4MCQCh. 15 - Pedee Companys inventory turnover in days is 80...Ch. 15 - Prob. 6MCQCh. 15 - Prob. 7MCQCh. 15 - Prob. 8MCQCh. 15 - A small pizza restaurant, founded and owned by the...Ch. 15 - Prob. 10MCQCh. 15 - Prob. 11BEACh. 15 - Scherer Company provided the following income...Ch. 15 - Chen Company has current assets equal to...Ch. 15 - Last year, Nikkola Company had net sales of...Ch. 15 - Last year, Nikkola Company had net sales of...Ch. 15 - Paxton Company provided the following income...Ch. 15 - Ernst Companys balance sheet shows total...Ch. 15 - Prob. 18BEACh. 15 - Prob. 19BEACh. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - Jasmine Company provided the following income...Ch. 15 - Jasmine Company provided the following income...Ch. 15 - LoLo Lemon Company has current assets equal to...Ch. 15 - Last year, Tobys Hats had net sales of 45,000,000...Ch. 15 - Last year, Tobys Hats had net sales of 45,000,000...Ch. 15 - Alessandra Makeup Manufactures provided the...Ch. 15 - Klynveld Companys balance sheet shows total...Ch. 15 - Prob. 31BEBCh. 15 - Prob. 32BEBCh. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - The income statement, statement of retained...Ch. 15 - Sundahl Companys income statements for the past 2...Ch. 15 - Sundahl Companys income statements for the past 2...Ch. 15 - Cuneo Companys income statements for the last 3...Ch. 15 - Cuneo Companys income statements for the last 3...Ch. 15 - Prob. 41ECh. 15 - Upton Company has current assets equal to...Ch. 15 - Montalcino Company had net sales of 54,000,000....Ch. 15 - Whalen Company had net sales of 125,500,250,000....Ch. 15 - Prob. 45ECh. 15 - Prob. 46ECh. 15 - Bryce Company manufactures pet supplies. However,...Ch. 15 - Prob. 48ECh. 15 - Prob. 49ECh. 15 - Juroe Company provided the following income...Ch. 15 - Juroe Company provided the following income...Ch. 15 - Juroe Company provided the following income...Ch. 15 - Rebert Inc. showed the following balances for last...Ch. 15 - Rebert Inc. showed the following balances for last...Ch. 15 - Rebert Inc. showed the following balances for last...Ch. 15 - The following selected information is taken from...Ch. 15 - Grammatico Company has just completed its third...Ch. 15 - The following information has been gathered for...Ch. 15 - Mike Sanders is considering the purchase of Kepler...Ch. 15 - Prob. 60PCh. 15 - Mike Sanders is considering the purchase of Kepler...Ch. 15 - Mike Sanders is considering the purchase of Kepler...Ch. 15 - Mike Sanders is considering the purchase of Kepler...Ch. 15 - Albion Inc. provided the following information for...Ch. 15 - Prob. 65PCh. 15 - Prob. 66PCh. 15 - Prob. 67C
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- Which of the statement is FALSE in financial decision making?   A. Large size of business needs a large capital  B. Large firms may obtain their fixed assets on the lease.  C. Large firms would need to construct their own building and assemble their own plantarrow_forwardFor the example below, list and describe the input(s) (observable or unobservable) and valuation technique(s) used. Determine the appropriate classification in the fair value hierarchy. Company A invested in the common stock of a private furniture manufacturer, Company Z. Quoted prices are not available for Company Z’s stock. Company Z’s fair value is measured as the present value of future cash flow. The measurement requires management assumptions such as discount rate, the amount and the timing of future cash flow.arrow_forwardWhen close to the zone of insolvency, managers have an incentive to gamble. This is known as  Question options:  a) an agency cost of debt that covenants cannot attenuate  b) an agency cost of equity known as fraudulent conveyance  c) an agency cost of debt that negative covenants can attenuate  d) an agency cost of debt that positive covenants can attenuatearrow_forward
- There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the companyarrow_forwardWhich of the following is a disadvantage of long-term debt as a means of company financing? Group of answer choices Debtholders have preferential status in the event of a company being wound up. Tax relief is available on interest payments. Debt is often quicker to arrange compared to equity. The amount and timing of interest payments is predictable, making budgeting easier.arrow_forwardA bank wants to implement a loan pricing model and has to look at several variables to consider. Please select the variable that is incorrectly described. a. A profit margin to provide the bank with an adequate return on capital. b. Risk premium to counter the effect of default risk. c. Cost of funding that include the cost of bonds issued. d. Operating costs that include the cost of interest paid to depositors.arrow_forward
- True or False: When a company borrows money to finance the purchase of an asset to use in its business, one of their likely goals is to earn a rate of return on that asset which is lower than the interest rate on the loan borrowing. Select one: True Falsearrow_forwardWhich of the following is not a factor that a firm's management take into consideration when deciding on its short-term financing policy? Multiple Choice  Short-term versus long-term investment opportunities.  Maturities of its assets and liabilities.  Behaviour of short-term rates versus long-term rates.  Product mix demand.  Liquidity needs.arrow_forwardThe finance manager is carefully selecting the best investment alternatives for a stable return from the investment opportunities. Which of the following role he is executing in the company? Select one: A. Financing Decision B. Interrelation with Departments C. None of the given options D. Investment Decisionarrow_forward
- Which of the following is true regarding a company assuming more debt?  Select one: a. Assuming more debt is always bad for the company b. Assuming more debt reduces leverage c. Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds d. Assuming more debt is always good for the companyarrow_forwardAn investment vehicle, the investee, is created and financed with a debt instrument held by a debt investor and equity instruments held by some other investors. The equity tranche is designed to absorb the first losses and to receive any residual return from the investee. One of the equity investors who hold 30% ofthe equity is also the asset manager. The investee uses its proceeds to purchase a portfolio of financial assets; thus, exposing them to the credit risk associated with the possible default of principal and interest payments of the assets. The transaction is marketed to the debt investor as an investment. Such investment has minimal exposure to the credit risk associated with the possible default of the assets in the portfolio. It is because of the nature of the assets and of the equity tranche.The returns of the investee are significantly affected by the management of the investee’s asset portfolio. Managing the asset portfolio includes decisions about the selection,…arrow_forwardIf managers of a company have inside information about the company’s future performances and such inside information is unknown to outsiders, then the company’s managers are most likely to use _____ to finance its project investment Group of answer choices a. the company’s retained earnings b. debt borrowing from banks c. share issuance to new investors d. there is no difference among the above three funding optionsarrow_forward
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