BUSI 320 Homework 3 Working Capital Management Assignment solutions complete answers

BUSI 320 Homework 3 Working Capital Management Assignment solutions complete answers

 

Dome Metals has credit sales of $432,000 yearly with credit terms of net 90 days, which is also the average collection period. Assume the firm adopts new credit terms of 2/15, net 90 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 11 percent. The new credit terms will increase sales by 10% because the 2% discount will make the firm's price competitive.

 

a. If Dome earns 15 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.)

 

Dome Metals has credit sales of $396,000 yearly with credit terms of net 45 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 45 days to pay.  

 

Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $306,000 in additional credit sales, 11 percent are likely to be uncollectible. The company will also incur $16,900 in additional collection expense. Production and marketing costs represent 71 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of three times. No other asset buildup will be required to service the new customers. The firm has a 12 percent desired return.

 

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $190,000 if credit were extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 78 percent of sales. The firm is in the 30 percent tax bracket.

 

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $52,800, but inventory would increase by $440,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent.

 

Diagnostic Supplies has expected sales of 162,000 units per year, carrying costs of $2 per unit, and an ordering cost of $5 per order.

 

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 97,200 units per year, an ordering cost of $4 per order, and carrying costs of $1.50 per unit.

 

Mervyn’s Fine Fashions has an average collection period of 35 days. The accounts receivable balance is $94,500.

 

b. If the firm had $1,680,000 in credit sales over the four-month period, compute the average collection period. Average daily credit sales should be based on a 120-day period.

 

a. If Neon Light Company has $2.05 million per day in collections and $1.01 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

 

b. If Neon Light Company can earn 7 percent per annum on freed-up funds, how much will the income be? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

 

Lear Inc. has $830,000 in current assets, $365,000 of which are considered permanent current assets. In addition, the firm has $630,000 invested in fixed assets.
   
a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 10 percent. The balance will be financed with short-term financing, which currently costs 6 percent. Lear’s earnings before interest and taxes are $230,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 40 percent.

 

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $230,000. What will be Lear’s earnings after taxes? The tax rate is 40 percent.

 

Assume the term structure of interest rates becomes inverted, with short-term rates going to 11 percent and long-term rates 3 percentage points lower than short-term rates. Earnings before interest and taxes are $1,060,000. The tax rate is 20 percent.  

 

Short-term rates are 9 percent. Long-term rates are 14 percent. Earnings before interest and taxes are $1,170,000. The tax rate is 40 percent.

 

Assume that Atlas Sporting Goods Inc. has $980,000 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 financing plan, the financing costs on the $980,000 will be 9 percent, and with a long-term financing plan the financing costs on the $980,000 will be 11 percent.

 

Biochemical Corp. requires $590,000 in financing over the next three years. The firm can borrow the funds for three years at 9.00 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 7.25 percent interest in the first year, 11.90 percent interest in the second year, and 8.15 percent interest in the third year. Assume interest is paid in full at the end of each year.

 

The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 36,000 units over four months at a level of 9,000 per month.

b. 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 .5 percent as the monthly rate.)

 

Question 1
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 there will be no inventory buildup. 
The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 32,100 units over four months at a level of 8,025 per month.
 

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

 

b. If the inventory costs $12 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1.0 percent as the monthly rate.)

 

Question 2
Biochemical Corp. requires $710,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. Assume interest is paid in full at the end of each year.
 

a. Determine the total interest cost under each plan.

 

b. Which plan is less costly?

 

Question 3
Assume that Atlas Sporting Goods Inc. has $940,000 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 15 percent. If the firm goes with a short-term financing plan, the financing costs on the $940,000 will be 12 percent, and with a long-term financing plan, the financing costs on the $940,000 will be 13 percent.
 

a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.

 

b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.

 

c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.

 

d. If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.)

 

e-1. Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.)

 

e-2. Would the conservative mix have higher or lower earnings per share than the aggressive mix?

 

Question 4
Colter Steel has $5,500,000 in assets.
 

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $1,160,000. The tax rate is 30 percent.

 

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?

 

Question 5
Colter Steel has $4,950,000 in assets. 
 

Assume the term structure of interest rates becomes inverted, with short-term rates going to 10 percent and long-term rates 4 percentage points lower than short-term rates. Earnings before interest and taxes are $1,050,000. The tax rate is 40 percent.  

 

Question 6
Lear Inc. has $1,000,000 in current assets, $450,000 of which are considered permanent current assets. In addition, the firm has $800,000 invested in fixed assets.    
 

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 9 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are $400,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.

 

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $400,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

 

Question 7
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 are:

 

a. Compute total dollar interest payments for the six months. (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)

 

b-1. Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)   

 

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 than with the short-term financing plan?

 

Question 8
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 are:

 

What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent. Input your answer as a percent rounded to 2 decimal places.)

 

Question 9
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. Each month's production is equal to annual sales (in units) divided by 12.

 

Of each month's sales, 20 percent are for cash and 80 percent are on account. All accounts receivable are collected in the month after the sale is made.

 

a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 24,000 units.

 

b. Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000.

 

c. Prepare a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $44,000 per month.

 

d. Prepare a monthly cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is $5,000, which is also the minimum desired. (Negative amounts should be indicated by a minus sign.)

 

Question 10
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 and one-half 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 $2.10 million per day in collections and $1.02 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

 

b. If Neon Light Company can earn 8 percent per annum on freed-up funds, how much will the income be? (Enter your answer in dollars not in millions (e.g., $1,234,567).)

 

c. If the total cost of the new system is $385,000, should it be implemented?

 

Question 11
Mervyn’s Fine Fashions has an average collection period of 35 days. The accounts receivable balance is $70,000.  
 

What is the value of its annual credit sales? (Use a 360-day year.)

 

Question 12
Route Canal Shipping Company has the following schedule for aging of accounts receivable:  
 

a. Calculate the percentage of amount due for each month.

 

b. If the firm had $1,692,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.

 

c. If the firm likes to see its bills collected in 45 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?

 

Question 13
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 58,800 units per year, an ordering cost of $4 per order, and carrying costs of $1.50 per unit.  
 

a. What is the economic ordering quantity?

 

b. How many orders will be placed during the year?

 

c. What will the average inventory be?

 

d. What is the total cost of ordering and carrying inventory?

 

Question 14
Diagnostic Supplies has expected sales of 136,900 units per year, carrying costs of $2 per unit, and an ordering cost of $4 per order.  
 

a. What is the economic ordering quantity?

 

b-1. What is the average inventory?

 

b-2. What is the 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?

 

c-2. What will the new total carrying cost be?

 

Question 15
Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $36,000, but inventory would increase by $360,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 11.0 percent.  
 

a-1. Determine the extra cost or savings of switching over to level production.

 

a-2. Should the company go ahead and switch to level production?  

 

b. How low would interest rates need to fall before level production would be feasible? (Input your answer as a percent rounded to the nearest whole number.)

 

Question 16
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $136,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 4 percent of sales, and production and selling costs will be 71 percent of sales. The firm is in the 35 percent tax bracket.  
 

a. Compute the incremental income after taxes.

 

b. What will Johnson’s incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.)

 

c. If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 17
Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $540,000 in additional credit sales, 15 percent are likely to be uncollectible. The company will also incur $18,100 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 30 percent tax bracket and has a receivables turnover of five times. No other asset buildup will be required to service the new customers. The firm has a 12 percent desired return. 
 

a-1. Calculate the incremental income after taxes.  

 

a-2. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.)

 

a-3. Should Fast Turnstiles Co. extend credit to these customers?

 

b-1. Calculate the incremental income after taxes if 18 percent of the new sales prove to be uncollectible.

 

b-2. Calculate the return on incremental investment if 18 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

 

b-3. Should credit be extended if 18 percent of the new sales prove uncollectible?

 

c-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 15 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.)

 

c-2. Should credit be extended if the receivables turnover drops to 1.6, and 15 percent of the accounts are uncollectible?

 

Question 18
Global Services is considering a promotional campaign that will increase annual credit sales by $480,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:  
 

All $480,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 77 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 25 percent.

 

a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.

 

b. Compute the accounts receivable collection costs and production and selling costs and then add the two figures together.

 

c. Compute the costs of carrying inventory.

 

d. Compute the depreciation expense on new plant and equipment.

 

e. Compute the total of all costs from parts b through d.

 

f. Compute income after taxes.

 

g-1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.)

 

g-2. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem?

 

Question 19
Dome Metals has credit sales of $450,000 yearly with credit terms of net 45 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 45 days to pay.  
 

a. What is the average receivables balance? (Use a 360-day year.)

 

b. What is the receivables turnover? (Use a 360-day year.)

 

Question 20
Dome Metals has credit sales of $540,000 yearly with credit terms of net 45 days, which is also the average collection period. Assume the firm adopts new credit terms of 2/15, net 45 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 12 percent. The new credit terms will increase sales by 10% because the 2% discount will make the firm's price competitive.
 

a. If Dome earns 20 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.)

 

b. Should the firm offer the discount?