BUSI-320 Corporate Finance connect homework 4

Compute the cost of not taking the following cash discounts.

(a)

2/18, net 40. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places . Omit the “%” sign in your response.)

(c-1)

After considering the hedging, what is the net cost to the firm of the increased interest expense of $72,000? (Omit the “$” sign in your response.)

  Net cost

[removed]  

(c-2)

What percent of this $72,000 cost did the treasurer effectively hedge away? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Percentage hedged away

[removed] %  

(d)

Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.

What is the present value of:

Use Appendix B.

$8,100 in 14 years at 7 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

(b)

$16,800 in 9 years at 8 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Present value

$ [removed]  

(c)

$26,500 in 20 years at 6 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

You will receive $6,800 three years from now. The discount rate is 10 percent.

What is the value of your investment two years from now? Multiply $6,800 × .909 (one year’s discount rate at 10 percent). (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Value of investment

What is the value of your investment one year from now? Multiply your answer to part a by .909 (one year’s discount rate at 10 percent). (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

What is the value of your investment today? Multiply your answer to part b by .909 (one year’s discount rate at 10 percent). (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

Calculate the present value by going to Appendix B (present value of $1) for n = 3 and i = 10%. Multiply this tabular value by $6,800 and compare your answer to the answer in part c. There may be a slight difference due to rounding. (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

If you invest $15,500 today, how much will you have:

Use Appendix A.

In 8 years at 7 percent? (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

In 19 years at 10 percent? (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Future value

In 20 years at 12 percent? (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

In 25 years at 12 percent (compounded semiannually)? (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Your uncle offers you the choice of $104,000 in 10 years or $32,000 today. Use Appendix B.

Calculate the present value of $104,000, if the money is discounted at 8 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Which choice should you choose?

Calculate the present value, if you had to wait until 12 years to get the $104,000. (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Now, which choice should you choose?

How much would you have to invest today to receive: Use Appendix B and Appendix D.

$12,250 in 6 years at 10 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

$16,000 in 14 years at 12 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

$6,000 each year for 13 years at 9 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

$42,000 each year for 25 years at 6 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

If you invest $8,300 per period for the following number of periods, how much would you have: Use Appendix C.

In 10 years at 8 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.)

In 40 years at 9 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.)

At a growth (interest) rate of 9 percent annually, how long will it take for a sum to double? To triple? UseAppendix A. (Select the year that is closest to the correct answer and round your answers to the nearest whole number.)

  Time taken to double

[removed]  years   

  Time taken to triple

Cousin Bertha invested $119,000 5 years ago at 8 percent, compounded quarterly. How much has she accumulated? Use Appendix A. (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Determine the amount of money in a savings account at the end of three years, given an initial deposit of $8,500 and an 12 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly. Use Appendix A. (Round “FV Factor” to 3 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

  (a) Annually

  (b) Semiannually

  (c) Quarterly

Annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the beginning of each period (termed an annuity due). To find the present value of an annuity due, subtract 1 from n and add 1 to the tabular value. To find the future value of an annuity, add 1 to n and subtract 1 from the tabular value. For example, to find the future value of a $100 payment at the beginning of each period for five periods at 10 percent, go to Appendix C for n = 6 and i = 10 percent. Look up the value of 7.716 and subtract 1 from it for an answer of 6.716 or $671.60 ($100 × 6.716). What is the future value of a 13-year annuity of $3,000 per period where payments come at the beginning of each period? The interest rate is 11 percent. Use Appendix C. (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Your grandfather has offered you a choice of one of the three following alternatives: $11,500 now; $5,700 a year for eight years; or $77,000 at the end of eight years. Use Appendix B and Appendix D.

(a-1)

Assuming you could earn 9 percent annually, compute the present value for the following amounts?(Round “PV Factor” to 3 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

  $11,500

  $5,700

  $77,000

(a-2)

Which alternative should you choose?

(b-1)

If you could earn 15 percent annually, compute the present value for the following amounts? (Round “PV Factor” to 3 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

(b-2)

You need $25,956 at the end of ten years, and your only investment outlet is a 7 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 Appendix B and Appendix C.

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

What amount could you pay at the end of each year annually for ten 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

Franklin Templeton has just invested $9,660 for his son (age one). This money will be used for his son’s education 18 years from now. He calculates that he will need $53,667 by the time the boy goes to school.

What rate of return will Mr. Templeton need in order to achieve this goal? Use Appendix A and Appendix B.(Round “PV Factor” to 3 decimal places and final answer to the closest interest rate. Omit the “%” sign in your response.)

  Rate of return

 [removed] %  

You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $24,000 for 25 years after retirement. During the period before retirement you can earn 10 percent annually, while after retirement you can earn 12 percent on your money.

What annual contributions to the retirement fund will allow you to receive the $24,000 annuity? Use Appendix C and Appendix D. (Round “PV Factor” and “FV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

  Annual contribution

Rusty Steele will receive the following payments at the end of the next three years: $17,000, $20,000, and $22,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $23,000.

At a discount rate of 10 percent, what is the present value of all future benefits? Use Appendix B and Appendix D. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

  Present value of all future benefits

If your aunt borrows $52,000 from the bank at 10 percent interest over the eight-year life of the loan. UseAppendix D.

What equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest? (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.)

  Annual payments

How much of her first payment will be applied to interest? To principal? (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

First payment

  Interest

  Principal

How much of her second payment will be applied to each? (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

Second payment

You are chairperson of the investment fund for the Continental Soccer League. You are asked to set up a fund of semiannual payments to be compounded semiannually to accumulate a sum of $210,000 after 8 years at an 10 percent annual rate (16 payments). The first payment into the fund is to take place six months from today, and the last payment is to take place at the end of the 8th year. Use Appendix A andAppendix C.

Determine how much the semiannual payment should be. (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Semi-annual payment

On the day after the sixth payment is made (the beginning of the fourth year) the interest rate goes up to a 12 percent annual rate, and you can earn a 12 percent annual rate on funds that have been accumulated as well as all future payments into the fund. Interest is to be compounded semiannually on all funds.

Determine how much the revised semiannual payments should be after this rate change (there are 10 payments and compounding dates). The next payment will be in the middle of the fourth year. (Round “FV Factor” to 3 decimal places, intermediate and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

  Revised semi-annual payments

Your uncle offers you the choice of $108,000 in 10 years or $37,000 today. Use Appendix B.

Calculate the present value of $108,000, if the money is discounted at 11 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

Compute the cost of not taking the following cash discounts.

(a)

2/18, net 40. (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 lost discount

 %

(c)

3/11, net

50

. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Regis Clothiers can borrow from its bank at 15 percent to take a cash discount. The terms of the cash discount are 2/

16

, net 90.

Compute the 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

Should the firm borrow the funds?

A

pawn shop will lend

$

1

58

for 12 days at a cost of $12 interest.

What is the effective rate of interest? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

  Effective rate

Mary Ott is going to borrow $6,900 for 60 days and pay $223 interest.

What is the effective rate of interest if the loan is discounted? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

  Effective rate on discounted loan

D

r. Ruth is going to borrow $7,200 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 12 percent and LIBOR 2.5 percent less. Also assume there will be a $45 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).

Which loan has the lower effective interest cost? (Use 360 days in a year.)

Prime

LIBOR

G

ulliver 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 12 percent against the euro.

What is the effective interest rate on the loan for one year? (Omit the “%” sign in your response.)

  Effective interest rate

Talmud Book Company borrows $21,500 for 30 days at 15 percent interest.

What is the dollar cost of the loan? (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  Cost of loan

$   

McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,520. Its average daily sales are $10,530, and it collects accounts in

25

days.

(a) 

What is its net credit position? (Omit the “$” sign in your response.)

  Net credit position

(b-1)

If the firm extends its average payment period from 20 days to

34

days (and all else remains the same), what is the firm’s new net credit position? (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.)

(b-2)

Has it improved its cash flow?

Computer Graphics Company needs $3

14

,760 in funds for a project.

With a compensating balance requirement of 14 percent, how much will the firm need to borrow? (Omit the “$” sign in your response.)

  Amount to be borrowed

 $   

Given your answer to part a and a stated interest rate of 18 percent on the total amount borrowed, what is the effective rate on the $314,760 actually being used? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

The Dade Company is borrowing $

35

1,000 for one year and paying $35,400 in interest to Miami National Bank. The bank requires a

27

percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed − Compensating balance).

What is the effective rate of interest? (Use 360 days in a year. Omit the “%” sign in your response.)

What would be the effective rate if the company were required to make 12 monthly payments to retire the loan? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Randall Corporation plans to borrow $285,000 for one year at 20 percent from the Waco State Bank. There is a 22 percent compensating balance requirement. Randall Corporation keeps minimum transaction balances of $14,000 in the normal course of business. This idle cash counts toward meeting the compensating balance requirement.

What is the effective rate of interest? (Use 360 days in a year. Round your answer to 2 decimal places. Omit the “%” sign in your response.)

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.

Simple 14 percent interest with a 18 percent compensating balance. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Discounted interest. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

An installment loan (12 payments). (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

Discounted interest with a 9 percent compensating balance. (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

If you borrow $5,300 at $400 interest for one year, what is your effective interest rate for the following payment plans? (Round your answers to 2 decimal places. Omit the “%” sign in your response.)

  (a) Annual payment

  (b) Semiannual payments

  (c) Quarterly payments

  (d) Monthly payments

Lewis and Clark Camping Supplies Inc. is borrowing $82,000 from Western State Bank. The total interest is $15,000. 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? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

 % 

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/17, net 95. Mr. Warner never takes the discount offered, but he pays his suppliers in 85 days rather than the 95 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

Calculate the cost of not taking a 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

Calculate the Effective rate of interest if the company borrow from the bank. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

Do you agree with Duke’s proposal?

Yes

No

Neveready Flashlights, Inc., needs $304,000 to take a cash discount of 2/19, net 74. A banker will loan the money for 55 days at an interest cost of $12,400.

What is the effective rate on the bank loan? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

(b) 

How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 74 days instead of 19 days? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

(c) 

Should the firm borrow the money to take the discount?

(d) 

If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $304,000? (Omit the “$” sign in your response.)

(e-1)

What would be the effective interest rate in part d if the interest charge for 55 days were $9,500? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

(e-2)

Should the firm borrow with the 20 percent compensating balance? (The firm has no funds to count against the compensating balance requirement.)

No

Yes

Summit Record Company is negotiating with two banks for a $185,000 loan. Fidelity Bank requires a 20 percent compensating balance, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a 10 percent compensating balance, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 13 percent.

(a-1)

Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Round your answers to 2 decimal places. Omit the “%” sign in your response.)

  Fidelity Bank

  Southwest Bank

(a-2)

Which loan should Summit accept?

Southwest Bank

Fidelity Bank

Recompute the effective cost of interest, assuming that Summit ordinarily maintains $37,000 at each bank in deposits that will serve as compensating balances. (Round your answers to 2 decimal places. Omit the “%” sign in your response.)

Does your choice of banks change if the assumption in part b is correct?

Charmin Paper Company sells to the 12 accounts listed below.

Receivable
balance outstanding

Average age of
the account
over the last year

63,100

219,000

43

77,100

26,300

56,800

243,000

36,200

315,000

67

44,600

33

J

98,300

K

235,000

69,600

    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 account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan.

    The current prime rate is 13.50 percent, and Capital charges 4.50 percent over prime to Charmin as its annual loan rate.

Determine the maximum loan for which Charmin Paper Company could qualify. (Omit the “$” sign in your response.)

  Maximum loan amount

Determine how much one month’s interest expense would be on the loan balance determined in part a.(Round your final answer to 2 decimal places. Omit the “$” sign in your response.)

   Interest expense

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 $118,000 per contract. It is July and the contracts must be closed out in December of this year. Long-term interest rates are currently 10.30 percent. If they increase to 12.50 percent, assume the value of the contracts will go down by 10 percent. Also if interest rates do increase by 2.20 percent, assume the firm will have additional interest expense on its business loans and other commitments of $72,000. This expense, of course, will be separate from the futures contracts.

What will be the profit or loss on the futures contract if interest rates go to 12.50 percent by December when the contract is closed out? (Input the amount as positive value. Omit the “$” sign in your response.)

   on futures contracts

(c-1)

After considering the hedging, what is the net cost to the firm of the increased interest expense of $72,000? (Omit the “$” sign in your response.)

  Net cost

(c-2)

What percent of this $72,000 cost did the treasurer effectively hedge away? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Percentage hedged away

 %  

Indicate whether there would be a profit or loss on the futures contracts if interest rates went down.

Loss

Profit