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Submitted by KnowledgeCats on Sat, 2013-09-21 03:49
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BUSI-320 Corporate Finance-2013 Fall-B Exam 2

BUSI-320 Corporate Finance-2013 Fall-B (Moten)

Exam 2

 

2.Problem 6-4 External financing [LO1]

Antivirus, Inc., expects its sales next year to be $4,400,000. Inventory and accounts receivable will increase by $670,000 to accommodate this sales level. The company has a steady profit margin of 20 percent with a 40 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

  



 

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

Assume that Hogan Surgical Instruments Co. has $3,000,000 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-term financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,000,000 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

 


 

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

Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $550,000 in temporary current assets and $450,000 in permanent current assets. Collins also has $650,000 in fixed assets.

    

(a)

Construct two alternative financing plans for the firm. One of the plans should be conservative, with 90 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 10 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 10 percent on long-term funds and 5 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 $430,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 30 percent. (Omit the "$" sign in your response.)

    

  

Earning

after taxes

  Conservative

 

  Aggressive

 




rev: 09_29_2011 

 

10.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

  1-year T-bill at beginning of year 2

  1-year T-bill at beginning of year 3

  1-year T-bill at beginning of year 4


 

 

Expected return

  2 year security

  3 year security

  4 year security


 

11.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

$

8,400  

  April

$

8,400  

  February

 

2,400  

  May

 

9,400  

  March

 

3,400  

  June

 

4,400  


 

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

 

 

 

 

 

 

 

  January

8.0

 %

  April

15.0

 %

  February

9.0

 

  May

12.0

 

  March

12.0

 

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

Winfrey Diet Food Corp. has $5,050,000 in assets.

 

 

 

 

  Temporary current assets

$

2,100,000  

  Permanent current assets

 

1,555,000  

  Fixed assets

 

1,395,000  

 



      Total assets

$

5,050,000  

 






   

Short-term rates are 14 percent. Long-term rates are 12 percent. Earnings before interest and taxes are $1,070,000. The tax rate is 30 percent.

   

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

   

  Earnings after taxes

 



rev: 03-18-2011, 04-18-2012, 06_23_2012 

15.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 $2.65 million per day in collections and $1.13 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions. Omit the "$" sign in your response.)

 

  Freed-up funds

  

 

(b)

If Neon Light Company can earn 9 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 $440,000, should it be implemented?

 

 



 

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

Mervyn’s Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $87,500. What is the value of its credit sales? (Use 360 days in a year. Omit the "$" sign in your response)

  

  Credit sales

 

18. 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

$

156,240  

_______

  March

31–60

 

78,120  

_______

  February

61–90

 

117,180  

_______

  January

91–120

 

39,060  

_______

  

 


 

     Total receivables

 

$

390,600  

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 $1,512,000 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 36 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 7-15 Economic ordering quantity with safety stock [LO5]

Diagnostic Supplies has expected sales of 120,000 units per year, a carrying cost of $6 per unit, and an ordering cost of $9 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 90 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

 

 

26.Problem 7-22 Credit policy and return on investment [LO4]

Global Services is considering a promotional campaign that will increase annual credit sales by $560,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

 

 

 

  Accounts receivable

4x  

  Inventory

2x  

  Plant and equipment

4x  


 

All $560,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will be 76 percent of sales. The cost to carry inventory will be 5 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 35 percent.

 

(a)

What is the value for inventory investment? (Omit the "$" sign in your response.)

 

  Inventory investment

 

 

(b-1)

Compute the total investment. (Omit the "$" sign in your response.)

 

  Total investment

  

 

(b-2)

Compute the cost of carrying inventory. (Omit the "$" sign in your response.)

 

  Cost of carrying inventory

  

 

(b-3)

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

 

  Income after taxes

  

 

(b-4)

What would be the return on investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

 

  Return on investment

 %  

 

(b-5)

If the required rate of return is 12 percent, should the campaign be undertaken?

 

 



 



29.Problem 8-2 Cash discount decision [LO1]

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.

 

(a)

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

 

 

(b)

Should the firm borrow the funds?

 

 

 

 

 

31.Problem 8-7 Effective rate on discounted loan [LO2]

Mary Ott is going to borrow $7,300 for 90 days and pay $221 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

%  



 

33.Problem 8-10 Dollar cost of a loan [LO2]

Talmud Book Company borrows $18,100 for 45 days at 11 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

  



 



   
    

39.Problem 8-18 Effective rate under different terms [LO2]

If you borrow $3,500 at $590 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.)

 

  

  Effective rate

  (a) Annual payment

 %  

  (b) Semiannual payments

 %  

  (c) Quarterly payments

 %  

  (d) Monthly payments

 %  




 

40.Problem 8-21 Cash discount under special circumstance [LO2]

Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/14, net 70. Mr. Warner 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 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

 

 

43.Problem 8-27 Accounts receivable financing [LO1]

Charmin Paper Company sells to the 12 accounts listed below.

 

Account

Receivable

balance outstanding

Average age of

the account

over the last year

A

$

63,700

 

 

20

 

B

 

197,000

 

 

44

 

C

 

74,400

 

 

16

 

D

 

23,600

 

 

61

 

E

 

59,600

 

 

43

 

F

 

318,000

 

 

39

 

G

 

33,300

 

 

17

 

H

 

309,000

 

 

67

 

I

 

46,600

 

 

33

 

J

 

90,300

 

 

52

 

K

 

277,000

 

 

15

 

L

 

65,900

 

 

39

 


 

    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 16.50 percent, and Capital charges 3.50 percent over prime to Charmin as its annual loan rate.

 

(a)

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

 

  Maximum loan amount

  

 

(b)

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

  





rev: 10_26_2012 

45.Problem 8-8 Prime vs. LIBOR [LO2]

Dr. Ruth is going to borrow $8,200 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 9 percent and LIBOR 2.5 percent less. Also assume there will be a $50 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.)

 

 

46.Problem 9-2 Present value [LO3]

What is the present value of:

 

 

(a)

$8,400 in 12 years at 11 percent? (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

(b)

$17,200 in 6 years at 9 percent? (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

(c)

$26,800 in 18 years at 10 percent? (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

47.Problem 9-4 Present value [LO4]

You will receive $9,000 three years from now. The discount rate is 13 percent.

 

(a)

What is the value of your investment two years from now? Multiply $9,000 × .885 (one year’s discount rate at 13 percent). (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Value of investment

 

(b)

What is the value of your investment one year from now? Multiply your answer to part a by .885 (one year’s discount rate at 13 percent). (Round "PV Factor" to 3 decimal places and final answer to 2 decimal places. Omit the "$" sign in your response.)

 

  Value of investment

 

(c)

What is the value of your investment today? Multiply your answer to part b by .885 (one year’s discount rate at 13 percent). (Round "PV Factor" to 3 decimal places and final answer to 2 decimal places. Omit the "$" sign in your response.)

 

  Value of investment

 

(d)

Calculate the present value by going to Appendix B (present value of $1) for n = 3 and i = 13%. Multiply this tabular value by $9,000 and compare your answer to the answer in part c. There may be a slight difference due to rounding. (Round "PV Factor" to 3 decimal places and final answer to 2 decimal places. Omit the "$" sign in your response.)

 

  Present value

 

49.Problem 9-7 Present value [LO3]

Your uncle offers you the choice of $115,000 in 10 years or $54,000 today. Use Appendix B.

 

(a)

Calculate the present value of $115,000, if the money is discounted at 11 percent? (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

 

(b)

Which choice should you choose?

 

 

 

 

 

50.Problem 9-8 Present value [LO3]

Your uncle offers you the choice of $107,000 in 10 years or $40,000 today. Use Appendix B.

 

(a)

Calculate the present value of $107,000, if the money is discounted at 8 percent? (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

(b)

Which choice should you choose?

 

 

 

 

(c)

Calculate the present value, if you had to wait until 12 years to get the $107,000. (Round "PV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

 

  Present value

 

(d)

Now, which choice should you choose?

 

 

 

54. Problem 9-25 Quarterly compounding [LO5]

Cousin Bertha invested $116,000 10 years ago at 8 percent, compounded quarterly. How much has she accumulated? Use Appendix A(Round "FV Factor" to 3 decimal places and final answer to the nearest dollar amount. Omit the "$" sign in your response.)

  

  Future value

 

55. Problem 9-26 Special compounding [LO5]

Determine the amount of money in a savings account at the end of one year, given an initial deposit of $12,000 and an 4 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly. Use Appendix A(Round "FV Factor" to 3 decimal places and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

 

 

Future value

  (a) Annually

  

  (b) Semiannually

  

  (c) Quarterly

  


 



61.Problem 9-38 Deferred annuity [LO3]

Rusty Steele will receive the following payments at the end of the next three years: $23,000, $26,000, and $28,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $29,000.

  

At a discount rate of 16 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

  



rev: 07-25-2011 

 



 

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Solution to BUSI-320 Corporate Finance-2013 Fall-B Exam 2

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