Dome metals has credit sales of

Corporate Finance-2013 Fall-B Assignment 3

Assignment: Homework 3

1.Problem 6-2 Expected value [LO6]

Sharpe Knife Company expects sales next year to be $1,540,000 if the economy is strong, $820,000 if the economy is steady, and $540,000 if the economy is weak. Mr. Sharpe believes there is a 25 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 15 percent probability of a weak economy.

What is the expected level of sales for the next year? (Omit the "$" sign in your response.)

Expected level of sales

$

2.Problem 6-4 External financing [LO1]

Antivirus, Inc., expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $590,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 percent dividend payout.

How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the "$" sign in your response.)

External funds needed

$

3.Problem 6-6 Level versus seasonal production [LO1]

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:

March

3,200

April

7,200

May

11,400

June

9,400

31,200

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.

The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,200 units over four months at a level of 7,800 per month.

(a)

What is the ending inventory at the end of each month? (Leave no cells blank - be certain to enter "0" wherever required.)

Ending inventory

March

April

May

June

(b)

If the inventory costs $17 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Inventory financing cost

March

$

April

May

June

Total financing cost

$

rev: 01_07_2013 4.Problem 6-8 Short-term versus longer-term borrowing [LO3]

Biochemical Corp. requires $530,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year.

(a)

Determine the total interest cost under each plan. (Omit the "$" sign in your response.)

Interest cost

Fixed cost financing

Variable short-term financing

(b)

Which plan is less costly?

5.Problem 6-9 Short-term versus longer-term borrowing [LO3]

Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $410,000. The company can borrow $410,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest.

(a)

How much would the firm save in interest over the three-year life of the computer system if the one-year loan is utilized, and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent three-year loan. (Omit the "$" sign in your response.)

Amount

9 Percent

11 Percent

Interest saving

(b)

What if interest rates on the 9 percent loan go up to 14 percent in the second year and 17 percent in the third year? What would be the total interest cost compared to the 11 percent, three-year loan? (Omit the "$" sign in your response.)

Amount

1st year

2nd year

3rd year

Extra interest cost

6.Problem 6-10 Optimal policy mix [LO5]

Assume that Hogan Surgical Instruments Co. has $3,200,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan, the return will be 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,200,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $3,200,000 will be 9 percent.

(a)

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(b)

Compute the anticipated return after financing costs with the most conservative asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(c)

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix. (Omit the "$" sign in your response.)

Anticipated return

Low liquidity

High liquidity

7.Problem 6-11 Optimal policy mix [LO5]

Assume that Atlas Sporting Goods, Inc., has $990,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 16 percent, but with a high-liquidity plan the return will be 13 percent. If the firm goes with a short-term financing plan, the financing costs on the $990,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $990,000 will be 12 percent.

(a)

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(b)

Compute the anticipated return after financing costs with the most conservative asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(c)

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix. (Omit the "$" sign in your response.)

Anticipated return

Low liquidity

High liquidity

(d)

If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Earnings per share

(e-1)

Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places. Omit the "$" sign in your response.)

Earnings per share

(e-2)

Would it be higher or lower than the earnings per share computed for the most aggressive plan computed in part d?

8. Problem 6-12 Matching asset mix and financing plans [LO3]

Winfrey Diet Food Corp. has $4,550,000 in assets.

Temporary current assets

$

1,100,000

Permanent current assets

1,505,000

Fixed assets

1,945,000

Total assets

$

4,550,000

Short-term rates are 7 percent. Long-term rates are 12 percent. Earnings before interest and taxes are $970,000. The tax rate is 20 percent.

If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? (Omit the "$" sign in your response.)

Earnings after taxes

$

9.Problem 6-13 Impact of term structure of interest rates on financing plan [LO4]

Winfrey Diet Food Corp. has $5,400,000 in assets.

Temporary current assets

$

2,800,000

Permanent current assets

1,590,000

Fixed assets

1,010,000

Total assets

$

5,400,000

Short-term rates are 12 percent. Long-term rates are 8 percent. Earnings before interest and taxes are $1,140,000. The tax rate is 40 percent.

What will earnings after taxes be? (Omit the "$" sign in your response.)

Earnings after taxes

$

10.Problem 6-14 Conservative versus aggressive financing [LO5]

Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $360,000 in temporary current assets and $260,000 in permanent current assets. Collins also has $460,000 in fixed assets.

(a)

Construct two alternative financing plans for the firm. One of the plans should be conservative, with 60 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 20 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing. Compute the annual interest payments under each plan.(Omit the "$" sign in your response.)

Total interest

Conservative

Aggressive

(b)

Given that Collins’s earnings before interest and taxes are $240,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 40 percent. (Omit the "$" sign in your response.)

Earning after taxes

Conservative

Aggressive

11.Problem 6-15 Alternative financing plans [LO5]

Lear, Inc., has $900,000 in current assets, $400,000 of which are considered permanent current assets. In addition, the firm has $700,000 invested in fixed assets.

(a)

Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 5 percent. Lear’s earnings before interest and taxes are $300,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent. (Omit the "$" sign in your response.)

Earnings after taxes

$

(b)

As an alternative, Lear might wish to finance all of its fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $300,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent. (Omit the "$" sign in your response.)

Earnings after taxes

$

12.Problem 6-16 Expectations hypothesis and interest rates [LO4]

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

1-year T-bill at beginning of year 1

6

%

1-year T-bill at beginning of year 2

9

%

1-year T-bill at beginning of year 3

10

%

1-year T-bill at beginning of year 4

12

%

Expected return

2 year security

3 year security

4 year security

13.Problem 6-18 Interest costs under alternative plans [LO3]

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

January

$

9,100

April

$

9,100

February

3,100

May

10,100

March

4,100

June

5,100

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

January

5.0

%

April

12.0

%

February

6.0

May

12.0

March

9.0

June

12.0

(a)

Compute total dollar interest payments for the six months. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Total dollar interest payments

$

(b-1)

Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Omit the "$" sign in your response.)

Total dollar interest payments

$

(b-2)

If long-term financing at 12 percent had been utilized throughout the six months, would the total dollar interest payments be larger or smaller?

rev: 12_14_2012 14.Problem 6-19 Break-even point in interest rates [LO3]

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

January

$

10,300

April

$

10,300

February

4,300

May

11,300

March

5,300

June

6,300

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

January

7.0

%

April

14.0

%

February

8.0

May

12.0

March

11.0

June

12.0

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round intermediate calculations and final answer to 2 decimal places. Omit the "%" sign in your response.)

Interest rate

%

15. Problem 6-21 Level production and related financing effects [LO3]

Bombs Away Video Games Corporation has forecasted the following monthly sales:

January

$

107,000

July

$

52,000

February

100,000

August

52,000

March

32,000

September

62,000

April

32,000

October

92,000

May

27,000

November

112,000

June

42,000

December

130,000

Total sales = $840,000

Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month's production is equal to annual sales (in units) divided by 12.

Of each month's sales, 40 percent are for cash and 60 percent are on account. All accounts receivable are collected in the month after the sale is made.

(a)

Construct a monthly production and inventory schedule in units. Beginning inventory in January is 32,000 units.

(b)

Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000.(Omit the "$" sign in your response.)

(c)

Determine a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $52,000 per month. (Omit the "$" sign in your response.)

(d)

Prepare a monthly cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is $5,000, which is also the minimum desired. (Leave no cells blank - be certain to enter "0" wherever required. Negative amounts should be indicated by a minus sign. Omit the "$" sign in your response.)

rev: 09_27_2012 16. Problem 7-2 Cost-benefit analysis of cash management [LO2]

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without offending suppliers. The bank has a remote disbursement center in Florida.

(a)

If Neon Light Company has $3.15 million per day in collections and $1.23 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions. Omit the "$" sign in your response.)

Freed-up funds

$

(b)

If Neon Light Company can earn 8 percent per annum on freed-up funds, how much will the income be?(Enter your answer in dollars not in millions. Omit the "$" sign in your response.)

Interest on freed-up cash

$

(c)

If the total cost of the new system is $490,000, should it be implemented?

17.Problem 7-4 International cash management [LO2]

Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume that in 2010 it held 250,000 reals in Brazil worth 180,000 dollars. It drew 13 percent interest, but the Brazilian real declined 26 percent against the dollar.

(a)

What was the value of the holdings, based on U.S. dollars, at year-end? (Omit the "$" sign in your response.)

Value of the holdings

$

(b)

What was the value of its holdings, based on U.S. dollars, at year-end if instead it drew 10 percent interest and the real went up by 14 percent against the dollar? (Omit the "$" sign in your response.)

Value of the holdings

$

18.Problem 7-10 Determination of credit sales [LO4]

Mervyn’s Fine Fashions has an average collection period of 35 days. The accounts receivable balance is $43,750. What is the value of its credit sales? (Use 360 days in a year. Omit the "$" sign in your response)

Credit sales

$

rev: 01_05_2013 19.Problem 7-11 Aging of accounts receivable [LO4]

Route Canal Shipping Company has the following schedule for aging of accounts receivable:

Age of receivables April 30, 2010

(1)

(2)

(3)

(4)

Month of sales

Age of account

Amounts

Percent of amount due

April

0–30

$

175,440

_______

March

31–60

87,720

_______

February

61–90

131,580

_______

January

91–120

43,860

_______

Total receivables

$

438,600

100%

(a)

Calculate the percentage of amount due for each month. (Omit the "%" sign in your response.)

Month of sales

Percent of amount due

April

March

February

January

Total receivables

(b)

If the firm had $1,548,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.

Average collection period

(c)

If the firm likes to see its bills collected in 39 days, should it be satisfied with the average collection period?

(d)

Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

20.Problem 7-13 Economic ordering quantity [LO5]

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 84,500 units per year, an ordering cost of $12 per order, and carrying costs of $1.20 per unit.

(a)

What is the economic ordering quantity?

Economic ordering quantity

(b)

How many orders will be placed during the year?

Number of orders

(c)

What will the average inventory be?

Average inventory

(d)

What is the total cost of ordering and carrying inventory? (Omit the "$" sign in your response.)

Total costs

21.Problem 7-15 Economic ordering quantity with safety stock [LO5]

Diagnostic Supplies has expected sales of 72,900 units per year, a carrying cost of $4 per unit, and an ordering cost of $8 per order.

(a)

What is the economic order quantity?

Economic order quantity

(b-1)

What is average inventory?

Average inventory

(b-2)

What is the total carrying cost? (Omit the "$" sign in your response.)

Total carrying cost

Assume an additional 60 units of inventory will be required as safety stock.

(c-1)

What will the new average inventory be?

Average inventory

(c-2)

What will the new total carrying cost be? (Omit the "$" sign in your response.)

Total carrying cost

22.Problem 7-16 Level versus seasonal production [LO5]

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $20,800, but inventory costs would increase by $260,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 9.5 percent.

(a-1)

Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the "$" sign in your response.)

Loss

$

(a-2)

Should the company go ahead and switch to level production?

No

(b)

How low would interest rates need to fall before level production would be feasible? (Omit the "%" sign in your response.)

Interest rate

%

23.Problem 7-17 Credit policy decision [LO4]

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $250,000 if credit is extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 70 percent of sales. The firm is in the 30 percent tax bracket.

(a)

Compute the incremental income after taxes. (Omit the "$" sign in your response.)

Incremental income after taxes

$

(b)

What will Johnson’s incremental return on sales be if these new credit customers are accepted?(Round your answer to 2 decimal places. Omit the "%" sign in your response.)