Assume That the Accounts Payable Department of a Company Has

question 26

Essay

Assume that the accounts payable department of a company has 10 clerks; each one is paid $25,000 per year ($250,000 total clerical salaries).Six of the clerks spend the following percentages of time on the three activities:
20% of time on processing payments
30% of time matching invoices,receiving documents,and billing statement
50% of time correcting errors in the various documents
One clerk,the head clerk,spends 50% of her time on administrative duties and the remainder on error correction.The remaining three clerks spend 30% of their time on processing payments and the remaining 70% of their time on matching documents.
Long distance telephone costs of $1,700 are directly traced to the activity "correcting errors."

Understand the principles of Modigliani & Miller (M&M) Propositions I & II without taxes, specifically regarding the irrelevance of capital structure.

Comprehend the effect of leverage on the cost of equity according to M&M Proposition II with no taxes.

Grasp the impact of debt financing on a firm's value and the cost of capital when taxes are considered.

Recognize the difference between business risk and financial risk, and their determinants.

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Definitions:

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Feed Grains

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