Question: Midland Chemical Co. is negotiating a loan

> Watt's Lighting Stores made the following sales projection for the next six months. All sales are credit sales. Sales in January and February were $33,000 and $32,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible,

> Kelly Greene has a contract in which she will receive the following payments for the next five years: $3,000, $4,000, $5,000, $6,000, and $7,000. She will then receive an annuity of $9,000 a year from the end of the sixth through the end of the 15th year

> Rusty Steele will receive the following payments at the end of the next three years: $4,000, $7,000, and $9,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $10,000. At a discount rate of 10 perce

> You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you

> C. D. Rom has just given an insurance company $30,000. In return, he will receive an annuity of $3,200 for 20 years. At what rate of return must the insurance company invest this $30,000 in order to make the annual payments? Interpolate.

> On January 1, 2008, Mr. Dow bought 100 shares of stock at $12 per share. On December 31, 2010, he sold the stock for $18 per share. What is his annual rate of return? Interpolate to find the answer.

> Your grandfather has offered you a choice of one of the three following alternatives: $5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If yo

> Mr. Flint retired as president of Color Title Company but is currently on a consulting contract for $45,000 per year for the next 10 years. a. If Mr. Flint’s opportunity cost (potential return) is 10 percent, what is the present value of his consulting c

> What is an asset-backed public offering?

> What is the difference between pledging accounts receivable and factoring accounts receivable?

> Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.

> Simpson Glove Company has made the following sales projections for the next six months. All sales are credit sales. Sales in January and February were $41,000 and $39,000 respectively. Experience has shown that of total sales receipts 10 percent are unc

> What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?

> What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

> How have new banking laws influenced competition?

> Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?

> What is meant by hedging in the financial futures market to offset interest rate risks?

> Briefly discuss three types of lender control used in inventory financing.

> What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?

> A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should the financial manager recognize as the true cost of borrowing?

> What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?

> Under what circumstances would it be advisable to borrow money to take a cash discount?

> Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as: Experience has shown that 20 percent of sales receipts are collected in the month of sale, 70 percent in the following month, and 10 percent are never

> The treasurer for Thornton Pipe and Steel Company wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $105,000 per contract. It is July and the contracts must be closed out in December of

> Texas Oil Supplies sells to the 12 accounts listed below. J&J Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 30 and 40 days; and 70 percent for account

> Columbus Shipping Company is negotiating with two banks for a $100,000 loan. Bankcorp of Ohio requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Cleveland Bank requires a 10 percent compe

> Bosworth Petroleum needs $500,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $8,100. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if Boswo

> In problem 19, if the compensating balance requirement were 10 percent instead of 25 percent, would you change your answer? Do the appropriate calculation.

> The Ogden Timber Company buys from its suppliers on terms of 2/10, net 35. Ogden has not been utilizing the discount offered and has been taking 50 days to pay its bills. The suppliers seem to accept this payment pattern, and Ogden’s credit rating has no

> Mr. Paul Promptly is a very cautious businessman. His supplier offers trade credit terms of 3/10, net 70. Mr. Promptly never takes the discount offered, but he pays his suppliers in 60 days rather than the 70 days allowed so he is sure the payments are n

> Vroom Motorcycle Company is borrowing $30,000 from First State Bank. The total interest is $9,000. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment loan?

> If you borrow $12,000 at $900 interest for one year, what is your effective interest rate for the following payment plans? a. Annual payment. b. Semiannual payments. c. Quarterly payments. d. Monthly payments.

> Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 14 percent interest. You would like to know the effective rate of interest for the following types of loans. (Each of the following parts stands alone.) a.

> Sprint Shoes, Inc., had a beginning inventory of 9,000 units on January 1, 2010. The costs associated with the inventory were: During 2010, the firm produced 42,500 units with the following costs: Sales for the year were 47,250 units at $39.60 each. Sp

> Tucker Drilling Corp. plans to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8½ percent (9 percent total) and requires a compensating balance of 20 percent. Principal in this case refers t

> The treasurer of Neiman Supermarkets is seeking a $30,000 loan for 180 days from Wrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percent compensating balance requirement. The treasurer always keeps a minimum of $2,500 in

> Capone Child Care Centers, Inc., plans to borrow $250,000 for one year at 10 percent from the Chicago Bank and Trust Company. There is a 20 percent compensating balance requirement. Capone keeps minimum transaction balances of $18,000 in the normal cours

> Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest? What would the effective rate be if Carey were required to make 12 eq

> Digital Access, Inc., needs $400,000 in funds for a project. a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow? b. Given your answer to part a and a stated interest rate of 9 percent on the total amount borro

> Maxim Air Filters, Inc., plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effective rate of interest?

> Sampson Orange Juice Company normally takes 20 days to pay for its average daily credit purchases of $6,000. Its average daily sales are $7,000, and it collects accounts in 28 days. a. What is its net credit position? That is, compute its accounts receiv

> Mo and Chris’s Sporting Goods, Inc., borrows $14,500 for 20 days at 12 percent interest. What is the dollar cost of the loan? Use the formula: Interest Days loan is outstanding Days in the year (360) Dollar cost Amount of loan borro

> Ida Kline borrows $8,000 for 90 days and pays $180 interest. What is the effective rate of interest if the loan is discounted?

> I. M. Boring borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?

> Assume in Problem 14 that the Bradley Corporation used LIFO accounting instead of FIFO; what would its gross profit be? What would be the value of ending inventory? Data from Problem 14: The Bradley Corporation produces a product with the following cost

> Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your effective rate of interest?

> Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest?

> Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds?

> Compute the cost of not taking the following cash discounts. a. 2/10, net 40. b. 2/15, net 30. c. 2/10, net 45. d 3/10, net 90.

> If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?

> What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid?

> What are three quantitative measures that can be applied to the collection policy of the firm?

> Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-1 on page 200. Which security would you choose for a short-term investment? Why?

> Why would a financial manager want to slow down disbursements?

> The Bradley Corporation produces a product with the following costs as of July 1, 2011: Beginning inventory at these costs on July 1 was 3,000 units. From July 1 to December 1, 2011, Bradley produced 12,000 units. These units had a material cost of $3,

> In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

> What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

> Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

> Why are Treasury bills a favorite place for financial managers to invest excess cash?

> Explain the similarities and differences of lockbox systems and regional collection offices.

> Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

> Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 100,000 kronas in Norway worth $35,000. The funds drew 12 percent interest, and the krona i

> If Dome offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $144,000 for your calculation of receivables.

> Assume that the new trade terms of 2/10, net 30 will increase sales by 15 percent because the discount makes the Dome’s price competitive. If Dome earns 20 percent on sales before discounts, should it offer the discount? (Consider the same variables as y

> If Dome reduces its bank loans, which cost 10 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm (don’t forget the 2 percent)? Should it offer the discount?

> At the end of January, Mineral Labs had an inventory of 725 units, which cost $10 per unit to produce. During February the company produced 650 units at a cost of $14 per unit. If the firm sold 1,000 units in February, what was the cost of goods sold? a.

> Dome Metals has credit sales of $144,000 yearly with credit terms of net 30 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 30 days to pay. What is the average receivable

> If inventory turnover had only been 4 times: a. What would be the new value for inventory investment? b. What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing inc

> Global Services is considering a promotional campaign that will increase annual credit sales by $400,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: All $400,000

> Reconsider problem 19C. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended? Data from Problem 19C: Comiskey Fence Co. is evaluating the extension of credit to

> Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $15,700 in additional

> Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 8 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent; and acc

> Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove t

> Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $30,000, but inventory would increase by $250,000. Wisconsin Snowmobile have to finance the

> Diagnostic Supplies has expected sales of 135,000 units per year, carrying costs of $3 per unit, and an ordering cost of $4 per order. a. What is the economic order quantity? b. What is the average inventory? What is the total carrying cost? c. Assum

> In the second year, Fisk Corporation finds that it can reduce ordering costs to $2 per order but that carrying costs will stay the same at $1.20. Also, volume remains at 75,000 units. a. Recompute a, b, c, and d in Problem 13 for the second year. b. Now

> At the end of January, Higgins Data Systems had an inventory of 600 units, which cost $16 per unit to produce. During February the company produced 850 units at a cost of $19 per unit. If the firm sold 1,100 units in February, what was its cost of goods

> Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of $8 per order, and carrying costs of $1.20 per unit. a. Wh

> Midwest Tires has expected sales of 12,000 tires this year, an ordering cost of $6 per order, and carrying costs of $1.60 per tire. a. What is the economic ordering quantity? b. How many orders will be placed during the year? c. What will the average

> Route Canal Shipping Company has the following schedule for aging of accounts receivable: a. Fill in column (4) for each month. b. If the firm had $1,440,000 in credit sales over the four-month period, compute the average collection period. Average dail

> Mervyn’s Fine Fashions has an average collection period of 40 days. The accounts receivable balance is $80,000. What is the value of its credit sales?

> In Problem 8, if accounts receivable change to $140,000, while credit sales are $1,440,000, should we assume the firm has a more or a less lenient credit policy? Hint: Recompute the average collection period.

> Barney’s Antique Shop has annual credit sales of $1,080,000 and an average collection period of 40 days. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales tim

> Eco-Friendly Products has annual credit sales of $900,000 and an average collection period of 30 days. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times

> Oral Roberts Dental Supplies has annual sales of $5,625,000. Eighty percent are on credit. The firm has $475,000 in accounts receivable. Compute the value of the average collection period.

> Sanders’ Prime Time Company has annual credit sales of $1,800,000 and accounts receivable of $210,000. Compute the value of the average collection period.

> Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 200,000 reals in Brazil worth 130,000 dollars. It drew 10 percent interest, but the Brazilian real declined 2

> On December 31 of last year, Wolfson Corporation had in inventory 400 units of its product, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per unit. Assuming that Wolfson Corporation sold 700 units in

> 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 one and on

> Beth’s Society Clothiers, Inc., has collection centers across the country to speed up collections. The company also makes payments from remote disbursement centers so the firm’s checks will take longer to clear the bank. Collection time has been reduced

> Logan Distributing Company of Atlanta sells fans and heaters to retail outlets through out the Southeast. Joe Logan, the president of the company, is thinking about changing the firm's credit policy to attract customers away from competitors. The present

> What does the term structure of interest rates indicate?

> Discuss the relative volatility of short- and long-term interest rates.

> What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory. Liquidity premium theory, the market segmentation theory, and the expectations theory.

> A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

> By using long-term financing to finance part of temporary current assts, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

> “The most appropriate financing pattern would be one in which asset buildup and length of financing terms is perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.

> How is a cash budget used to help manage current assets?

> Delsing Plumbing Company has beginning inventory of 14,000 units, will sell 50,000 units for the month, and desires to reduce ending inventory to 40 percent of beginning inventory. How many units should Delsing produce?

> Mansfield Corporation had 2010 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows: The dividend payout rate is 50 percent of earnings, and the balance in retained earnings at the end of 2010