Use the Information for the Question(s) Below

question 22

Multiple Choice

Use the information for the question(s) below.
Consider two firms, Firm X and Firm Y, that have identical assets that generate identical cash flows. Firm Y is an all-equity firm, with 1 million shares outstanding that trade for a price of $24 per share. Firm X has 2 million shares outstanding and $12 million in debt at an interest rate of 5%.
-Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as Firm X. You have $5,000 of your own money to invest and you plan on buying Firm X stock. Using homemade (un) leverage, how much do you need to invest at the risk-free rate so that the payoff of your account will be the same as a $5,000 investment in Firm Y stock?

• A) $5,000
• B) $0
• C) $2,500
• D) $4,000

Prepare adjusting entries for interest on notes receivable.

Calculate average collection period and understand its significance.

Understand the implications of a note receivable being honoured or dishonoured.

Analyze the liquidity of a company through the receivables turnover ratio.

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Definitions:

Total Inventory Cost

The complete cost associated with purchasing or producing inventory, including purchase price, conversion costs, and other costs.

Units Sold

The total number of a product that a company sells within a specific time period, often used to measure sales performance.

Periodic LIFO

Periodic LIFO (Last-In, First-Out) is an inventory valuation method used in accounting that assumes the most recently purchased items are sold first, and ending inventory costs are determined at the end of the accounting period.

Ending Inventory

The total value of all inventory a company has in its possession at the end of a reporting period, vital for calculating cost of goods sold.