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 three 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 affecting suppliers. The bank has a remote disbursement center in Florida. a. If Neon Light Company has $2.25 million per day in collections and $1.05 million per day in disbursements, how many dollars will the cash management system free up? b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be? c. If the total cost of the new system is $400,000, should it be implemented?
> Sherwin Williams will receive $18,500 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 12 percent is applied, should he be willing to sell out his future rights now for $165,000?
> Phil Goode will receive $175,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?
> Mrs. Crawford will receive $7,600 a year for the next 19 years from her trust. If a 14 percent interest rate is applied, what is the current value of the future payments?
> You invest a single amount of $10,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?
> Sun Microsystems is a leading supplier of computer-related products, including servers, workstations, storage devices, and network switches. In the letter to stockholders as part of the 2001 annual report, President and CEO Scott G. McN
> If you invest $8,500 per period for the following number of periods, how much would you have? a. 12 years at 10 percent. b. 50 years at 9 percent.
> How much would you have to invest today to receive a. $15,000 in 8 years at 10 percent? b. $20,000 in 12 years at 13 percent? c. $6,000 each year for 10 years at 9 percent? d. $50,000 each year for 50 years at 7 percent?
> You invest $3,000 for three years at 12 percent. a. What is the value of your investment after one year? Multiply $3,000 × 1.12. b. What is the value of your investment after two years? Multiply your answer to part a by 1.12. c. What is the value of your
> Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 9 percent for one year. During this time period the dollar falls 14 percent against the euro. What is the effective interest rate on the loan for one year? (Consi
> Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 11 percent and LIBOR 1.5 percent less. Also assume there will be a $45 tr
> Mary Ott is going to borrow $10,400 for 120 days and pay $150 interest. What is the effective rate of interest if the loan is discounted?
> Sol Pine borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?
> A pawnshop will lend $2,500 for 45 days at a cost of $35 interest. What is the effective rate of interest?
> Simmons Corp. can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 1.5/10, net 45. Should the firm borrow the funds?
> The treasurer for Pittsburgh Iron Works wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $138,000 per contract. It is July and the contracts must be closed out in December of this year.
> Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a proposal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen products. Mr. Lamar is quick to point out the increase in sal
> Charming Paper Company sells to the 12 accounts listed here. Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for acco
> Summit Record Company is negotiating with two banks for a $151,000 loan. Fidelity Bank requires a 28 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 14 percent compensating
> Harper Engine Company needs $631,000 to take a cash discount of 2.5/20, net 75. A banker will lend the money for 55 days at an interest cost of $13,300. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if Ha
> Neveready Flashlights Inc. needs $340,000 to take a cash discount of 3/17, net 72. A banker will lend the money for 55 days at an interest cost of $10,400. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if
> The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills. Mr. Duke, Vice President of Reynolds Corporation, has suggested that the compan
> The Reynolds Corporation buys from its suppliers on terms of 3/17, net 45. Reynolds has not been utilizing the discounts offered and has been taking 45 days to pay its bills. Mr. Duke, Reynolds Corporation vice president, has suggested that the company b
> Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/15, net 85. Mr. Warner never takes the discount offered, but he pays his suppliers in 75 days rather than the 85 days allowed so he is sure the payments are never
> Lewis and Clark Camping Supplies Inc. is borrowing $51,000 from Western State Bank. The total interest is $15,700. 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
> Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
> Zerox Copying Company plans to borrow $172,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 17½ percent (18 percent total) and requires a compensating balance of 21 percent. The principal i
> United Technology Corporation (UTC) has $40 million of convertible bonds outstanding (40,000 bonds at $1,000 par value) with a coupon rate of 11 percent. Interest rates are currently 8 percent for bonds of equal risk. The bonds have 15 years left to matu
> If you borrow $5,300 at $400 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 $13 million for 12 months, and your banker gives you a stated rate of 24 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.
> The treasurer for the Macon Blue Sox baseball team is seeking a $23,600 loan for one year from the 4th National Bank of Macon. The stated interest rate is 10 percent, and there is a 15 percent compensating balance requirement. The treasurer always keeps
> Randall Corporation plans to borrow $233,000 for one year at 20 percent from the Waco State Bank. There is a 21 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of $17,500 in the normal course of business.
> 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 borrowe
> 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?
> McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of $9,530. Its average daily sales are $10,680, and it collects accounts in 32 days. a. What is its net credit position? That is, compute its accounts receivable an
> Talmud Book Company borrows $24,900 for 60 days at 12 percent interest. What is the dollar cost of the loan?
> Barney’s Antique Shop has annual credit sales of $1,620,000 and an accounts receivable balance of $157,500. Calculate the average collection period (use 360 days in a year).
> Darla’s Cosmetics has annual credit sales of $1,440,000 and an average collection period of 45 days in 2008. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales
> Fondren Exploration Ltd. has 1,000 convertible bonds ($1,000 par value) outstanding, each of which may be converted to 50 shares of stock. The $1 million worth of bonds has 25 years to maturity. The current price of the stock is $26 per share. The firm’s
> Knight Roundtable Co. has annual credit sales of $1,080,000 and an average collection period of 32 days in 2008. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit s
> Oral Roberts Dental Supplies has annual sales of $5,200,000. Ninety percent are on credit. The firm has $559,000 in accounts receivable. Compute the value of the average collection period.
> Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. 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 240,000 reals in Brazil worth 170,000 dollars. It drew 12 percent interest, but the Brazilian real declined 2
> 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 150,000 kronas in Norway worth $40,000. The funds drew 13 percent interest, and the krona i
> Dome Metals has credit sales of $180,000 yearly with credit terms of net 60 days, which is also the average collection period. Dome offered a 3 percent discount for payment in 18 days, and Dome reduced its bank loans, which cost 12 percent. Assume that t
> Dome Metals had credit sales of $180,000 yearly with credit terms of net 60 days, which is also the average collection period. If Dome offered a 3 percent discount for payment in 18 days and every customer took advantage of the new terms and reduced its
> Dome Metals has credit sales of $180,000 yearly with credit terms of net 60 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 60 days to pay. What is the average receivable
> Global Services is considering a promotional campaign that will increase annual credit sales by $450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: All $450,000
> Slow Roll Drum 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 $16,200 in additional
> Modern Furniture Company had finally arrived at the point where it had a sufficient excess cash flow of $4.8 million to consider paying a dividend. It had 3 million shares of stock outstanding and was considering paying a cash dividend of $1.60 per share
> Fast Turnstiles 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 $16,200 in additional
> Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and acc
> Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to
> Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and after tax costs would decline by $36,000, but inventory would increase by $300,000. Wisconsin Snowmobile has to finance the
> Diagnostic Supplies has expected sales of 84,100 units per year, carrying costs of $5 per unit, and an ordering cost of $10 per order. a. What is the economic order quantity? b. What is the average inventory? What is the total carrying cost? c. Assume an
> Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of $2 per order, and carrying costs of $1.60 per unit. a. What
> Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of $8 per order, and carrying costs of $1.60 per unit. a. What
> Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of $6 per order, and carrying costs of $2.40 per pipe. a. What is the economic ordering quantity? b. How many orders will be placed during the year? c. What will the aver
> 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 $1,500,000 in credit sales over the four-month period, compute the average collection period. Average dai
> Dr. Robert Grossman founded Electro Cardio Systems Inc. (ECS) in 2001. The principal purpose of the firm was to engage in the research and development of heart pump devices. Although the firm did not show a profit until 2006, by 2010 it reported after ta
> Mervyn’s Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $95,000. What is the value of its credit sales?
> City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day
> Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest. How much w
> Biochemical Corp. requires $550,000 in financing over the next three years. The firm can borrow the funds for three years at 10.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead,
> Boatler Used Cadillac Co. requires $850,000 in financing over the next two years. The firm can borrow the funds for two years at 12 percent interest per year. Mr. Boatler decides to do forecasting and predicts that if he utilizes short-term financing ins
> Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: If seasonal production is used, it is assumed that inventory will directly match sales for each month and t
> Antonio Banderos & Scarves makes headwear that is very popular in the fall-winter season. Units sold are anticipated as: If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inve
> Antivirus Inc. expects its sales next year to be $2,500,000. Inventory and accounts receivable will increase $480,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much extern
> Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will increase $90,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 40 percent dividend payout. How much exter
> Esquire Products Inc. expects the following monthly sales: Cash sales are 40 percent in a given month, with the remainder going into accounts receivable. All receivables are collected in the month following the sale. Esquire sells all of its goods for
> The Crandall Corporation currently has 100,000 shares outstanding that are selling at $50 per share. It needs to raise $900,000. Net income after taxes is $500,000. Its vice president of finance and its investment banker have decided on a rights offering
> Bombs Away Video Games Corporation has forecasted the following monthly sales: 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. Eac
> Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales: January……………………………..$65,000 February……………………………… 55,000 March…………………………
> Sharpe Knife Company expects sales next year to be $1,550,000 if the economy is strong, $825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent
> In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? Data from Problem 18: Carmen’s Beauty Salon has estimated monthly financ
> Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: Short-term financing will be utilized for the next six months. Projected annual interest rates: a. Compute total dollar interest
> 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. Do an analysis similar to that in the right-hand po
> 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. Do an analysis similar to that. 1-year T-bill
> Lear Inc. has $840,000 in current assets, $370,000 of which are considered permanent current assets. In addition, the firm has $640,000 invested in fixed assets. a. Lear wishes to finance all fixed assets and half of its permanent current assets with lon
> Guardian Inc. is trying to develop an asset-financing plan. The firm has $400,000 in temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent. a. Construct two alternat
> In Problem 12, assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 5 percentage points lower than short-term rates. If all other factors in the problem remain unchanged, what will e
> Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that
> Colter Steel has $4,200,000 in assets. Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-ter
> Assume that Atlas Sporting Goods Inc. has $840,000 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 12 percent. If the firm goes with a short-term financ
> Assume that Hogan Surgical Instruments Co. has $2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-ter
> What is the difference between book value per share of common stock and market value per share? Why does this disparity occur?
> Discuss some financial variables that affect the price-earnings ratio.
> It has often been said that if the company can’t earn a rate of return greater than the cost of capital, it should not make investments. Explain.
> Explain the traditional, U-shaped approach to the cost of capital.
> Why is the remaining time to maturity an important factor in evaluating the impact of a change in yield to maturity on bond prices?
> What approaches can be taken in valuing a firm’s stock when there is no cash dividend payment?
> What factors might influence a firm’s price-earnings ratio?
> The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm’s investment banker, Robert Merrill and Company, is working with Bailey Corporat
> List five different financial applications of the time value of money.
> Why might disinflation prove to be favorable to financial assets?
> Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumption
> Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?
> What is free cash flow? Why is it important to leveraged buyouts?
> Name the departments, offices, or agencies that were created by the Dodd–Frank legislation.
> How did the Sarbanes–Oxley Act impact corporations’ financial reports?
> What changes can take place under restructuring? In recent times, what group of investors has often forced restructuring to take place?
