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1.
Problem 6-14 Conservative versus aggressive financing [LO5]
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Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $ 520,000 in temporary current assets and $420,000 in permanent current assets. Collins also has $620,000 in fixed assets. |
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(a) |
Construct two alternative financing plans for the firm. One of the plans should be conservative, with 60 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 20 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 13 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.(Omit the “$” sign in your response.) |
Total interest
Conservative
$
Aggressive
$
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(b) |
Given that Collins’s earnings before interest and taxes are $400,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 25 percent. (Omit the “$” sign in your response.) |
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Earning |
3.
Problem 6-8 Short-term versus longer-term borrowing [LO3]
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Biochemical Corp. requires $690,000 in financing over the next three years. The firm can borrow the funds for three years at 9.25 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 7.50 percent interest in the first year, 12.15 percent interest in the second year, and 8.25 percent interest in the third year. |
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Determine the total interest cost under each plan. (Omit the “$” sign in your response.) |
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Interest cost |
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Fixed cost financing |
$ |
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Variable short-term financing |
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Which plan is less costly? |
4.
Problem 6-12 Matching asset mix and financing plans [LO3]
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Winfrey Diet Food Corp. has $4,950,000 in assets. |
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Temporary current assets |
$ |
1,900,000 |
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Permanent current assets |
1,545,000 |
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Fixed assets |
1,505,000 |
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Total assets |
4,950,000 |
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Short-term rates are 9 percent. Long-term rates are 14 percent. Earnings before interest and taxes are $1,050,000. The tax rate is 40 percent. |
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If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? (Omit the “$” sign in your response.) |
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Earnings after taxes |
5.
Problem 6-18 Interest costs under alternative plans [LO3]
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Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: |
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January |
9,600 |
April |
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February |
3,600 |
May |
10,600 |
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March |
4,600 |
June |
5,600 |
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Short-term financing will be utilized for the next six months. Projected annual interest rates are: |
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5.0 |
% |
12.0 |
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6.0 |
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9.0 |
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Compute total dollar interest payments for the six months. (Round your intermediate and final answers to 2 decimal places. Omit the “$” sign in your response.) |
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Total dollar interest payments |
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(b-1) |
Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Omit the “$” sign in your response.) |
Total dollar interest payments
$
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(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? |
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Smaller Larger |
6.
Problem 6-6 Level versus seasonal production [LO1]
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Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: |
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3,100 |
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7,100 |
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11,200 |
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9,200 |
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30,600 |
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If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. |
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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 30,600 units over four months at a level of 7,650 per month. |
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What is the ending inventory at the end of each month? (Leave no cells blank – be certain to enter “0” wherever required.) |
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Ending |
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If the inventory costs $12 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) |
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Inventory |
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Total financing cost |
$ |
7.
Problem 7-22 Credit policy and return on investment [LO4]
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Global Services is considering a promotional campaign that will increase annual credit sales by $540,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: |
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Accounts receivable |
4x |
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Inventory |
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Plant and equipment |
2x |
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All $540,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 74 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 25 percent. |
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What is the value for inventory investment? (Omit the “$” sign in your response.) |
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Inventory investment |
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Compute the total investment. (Omit the “$” sign in your response.) |
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Total investment |
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Compute the cost of carrying inventory. (Omit the “$” sign in your response.) |
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Cost of carrying inventory |
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(b-3) |
Compute income after taxes. (Omit the “$” sign in your response.) |
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Income after taxes |
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(b-4) |
What would be the return on investment? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
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Return on investment |
% |
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(b-5) |
If the required rate of return is 10 percent, should the campaign be undertaken? |
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Yes No |
8.
Problem 7-21 Credit policy and return on investment [LO4]
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Global Services is considering a promotional campaign that will increase annual credit sales by $630,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: |
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5x |
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8x |
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3x |
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All $630,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 74 percent of sales. The cost to carry inventory will be 8 percent of inventory. Depreciation expense on plant and equipment will be 20 percent of plant and equipment. The tax rate is 25 percent. |
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Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. (Omit the “$” sign in your response.) |
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Total Investment |
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Compute the accounts receivable collection costs and production and selling costs and add the two figures together. (Omit the “$” sign in your response.) |
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Collection cost |
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Production and selling costs |
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Total costs related to accounts receivable |
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(c) |
Compute the costs of carrying inventory. (Omit the “$” sign in your response.) |
Cost of carrying inventory
$
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(d) |
Compute the depreciation expense on new plant and equipment. (Omit the “$” sign in your response.) |
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Depreciation expense |
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(e) |
Compute total cost. (Omit the “$” sign in your response.) |
| Total costs |
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(f) |
Income after taxes
$
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(g) |
If the firm has a required return on investment of 14 percent, should it undertake the promotional campaign described throughout this problem? |
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Yes No 9. Diagnostic Supplies has expected sales of 72,900 units per year, a carrying cost of $4 per unit, and an ordering cost of $8 per order.
(a) What is the economic order quantity?
Economic order quantity units (b-1) What is average inventory?
Average inventory units (b-2) What is the total carrying cost? (Omit the “$” 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 units (c-2) What will the new total carrying cost be? (Omit the “$” sign in your response.)
Total carrying cost $ references 10. Route Canal Shipping Company has the following schedule for aging of accounts receivable:
Age of receivables (1) (2) (3) (4) Month of Age of Amounts Percent of April 0–30 $ 223,040 _______ March 31–60 83,640 _______ February 61–90 195,160 _______ January 91–120 55,760 _______
Total receivables $ 557,600 100%
(a) Calculate the percentage of amount due for each month. (Omit the “%” sign in your response.)
Month of sales Percent of April % March % February % January %
Total receivables 100 %
(b) If the firm had $1,632,000 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 days
(c) If the firm likes to see its bills collected in 40 days, should it be satisfied with the average collection period?
Yes No
(d) Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?
Yes No 11. Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $31,900, but inventory costs would increase by $290,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 12.5 percent. (a-1) Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the “$” sign in your response.)
$ (a-2) Should the company go ahead and switch to level production?
Yes No
(b) How low would interest rates need to fall before level production would be feasible? (Omit the “%” sign in your response.)
Interest rate % references 12. Your company plans to borrow $10 million for 12 months, and your banker gives you a stated rate of 14 percent interest. Calculate the effective rate of interest for the following types of loans.
(a) Simple 14 percent interest with a 18 percent compensating balance. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Effective rate % (b) Discounted interest. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Effective rate % (c) An installment loan (12 payments). (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Effective rate % (d) Discounted interest with a 9 percent compensating balance. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Effective rate % 16. Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 2/15, net 90. Mr. Warner never takes the discount offered, but he pays his suppliers in 80 days rather than the 90 days allowed so he is sure the payments are never late. What is Mr. Warner’s cost of not taking the cash discount? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)
Cost of not taking a cash discount % references 19. You wish to retire in 13 years, at which time you want to have accumulated enough money to receive an annual annuity of $16,000 for 18 years after retirement. During the period before retirement you can earn 12 percent annually, while after retirement you can earn 14 percent on your money. What annual contributions to the retirement fund will allow you to receive the $16,000 annuity? Use Annual contribution $ 20. You need $24,356 at the end of nine years, and your only investment outlet is a 11 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year. Use
(a) What single payment could be made at the beginning of the first year to achieve this objective? (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)
Single payment made $
(b) What amount could you pay at the end of each year annually for nine years to achieve this same objective? (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)
Amount to be paid $ 21. Determine the amount of money in a savings account at the end of four years, given an initial deposit of $13,000 and an 4 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly. Use
Future value (a) Annually $ (b) Semiannually $ (c) Quarterly $ 25. If you invest $8,700 per period for the following number of periods, how much would you have:
(a) In 14 years at 7 percent? (Use the values provided in the table exactly as given (1, 2, or 3 decimal places). If you use another source for these compounding factors, round to three decimal places. Round your final answer to the nearest dollar amount. Omit the “$” sign in your response.)
Future value $
(b) In 25 years at 7 percent? (Use the values provided in the table exactly as given (1, 2, or 3 decimal places). If you use another source for these compounding factors, round to three decimal places. Round your final answer to the nearest dollar amount. Omit the “$” sign in your response.)
Future value |
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