BUSI 320 Quiz 2 Working Capital Management and Time Value of Money solutions complete answers

BUSI 320 Quiz 2 Working Capital Management and Time Value of Money solutions complete answers

 

Juan Garza invested $116,000 10 years ago at 8 percent, compounded quarterly. How much has he accumulated? Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

You wish to retire in 14 years, at which time you want to have accumulated enough money to receive an annual annuity of $17,000 for 19 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money.
 

What annual contributions to the retirement fund will allow you to receive the $17,000 annuity? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.

 

Franklin Templeton has just invested $9,960 for his son (age one). This money will be used for his son’s education 17 years from now. He calculates that he will need $79,680 by the time the boy goes to school.

 

Your father offers you a choice of $100,000 in 13 years or $45,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 9 percent, what is the present value of the $100,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b-1. Now assume the offer is $100,000 in 10 years or $45,000 today. What is the present value of the $100,000 at 9 percent for 10 years? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Your parents have accumulated a $150,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $18,000 to help her get started, and they have decided to take year-end vacations costing $12,000 per year for the next four years. Use 6 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.

 

If your uncle borrows $68,000 from the bank at 10 percent interest over the eight-year life of the loan. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

Del Monty will receive the following payments at the end of the next three years: $16,000, $19,000, and $21,000. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of $22,000 per year.



Determine the amount of money in a savings account at the end of 3 years, given an initial deposit of $7,500 and a 12 percent annual interest rate when interest is compounded: Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

Dr. Ruth is going to borrow $5,800 to help write a book. The loan is for one year and the money can be borrowed at either the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 1.0 percent less. Also assume there will be a $55 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).



If you borrow $9,500 at $760 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places.)  

 

Mary Ott is going to borrow $5,200 for 75 days and pay $236 interest.  



Summit Record Company is negotiating with two banks for a $171,000 loan. Fidelity Bank requires a compensating balance of 14 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 7 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 12 percent. Compensating balances will be subtracted from the $171,000 in determining the available funds in part a.

 

The Reynolds Corporation buys from its suppliers on terms of 3/18, net 55. Reynolds has not been utilizing the discounts offered and has been taking 55 days to pay its bills.
  
Ms. Duke, Reynolds Corporation's vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 18 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.  

 

b. If the firm had $1,524,000 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.

 

Diagnostic Supplies has expected sales of 144,400 units per year, carrying costs of $3 per unit, and an ordering cost of $6 per order.

 

Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $47,300, but inventory would increase by $430,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 12.5 percent.

 

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



a. If Neon Light Company has $2.40 million per day in collections and $1.08 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).)

 

Dome Metals has credit sales of $306,000 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.  

 

Assume the term structure of interest rates becomes inverted, with short-term rates going to 14 percent and long-term rates 4 percentage points lower than short-term rates. Earnings before interest and taxes are $1,040,000. The tax rate is 30 percent.  

 

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.

 

Biochemical Corp. requires $540,000 in financing over the next three years. The firm can borrow the funds for three years at 11.80 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.50 percent interest in the first year, 12.90 percent interest in the second year, and 9.75 percent interest in the third year. Assume interest is paid in full at the end of each year.

 

Short-term rates are 12 percent. Long-term rates are 17 percent. Earnings before interest and taxes are $1,140,000. The tax rate is 40 percent.

 

Question 
Guardian Inc. is trying to develop an asset-financing plan. The firm has $410,000 in temporary current assets and $310,000 in permanent current assets. Guardian also has $510,000 in fixed assets. Assume a tax rate of 30 percent.
 

a. Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 70 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 16 percent on long-term funds and 8 percent on short-term financing. Compute the annual interest payments under each plan.

 

b. Given that Guardian’s earnings before interest and taxes are $290,000, calculate earnings after taxes for each of your alternatives

 

c. What would the annual interest and earnings after taxes for the conservative and aggressive strategies be if the short-term and long-term interest rates were reversed?

 

Question 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 
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 3 percent of new sales, production and selling costs are 72 percent, and the accounts receivable turnover is four times. Assume income taxes of 25 percent and an increase in sales of $77,000. No other asset buildup will be required to service the new accounts.  
 

a. What additional investment in accounts receivable is needed to support this sales expansion?

 

b. What would be Henderson’s incremental aftertax return on investment? (Input your answer as a percent rounded to 2 decimal places.)

 

c. Should Henderson liberalize credit if a 20 percent aftertax return on investment is required?

 

Assume that Henderson also needs to increase its level of inventory to support new sales and that the inventory turnover is four times.  

 

d. What would be the total incremental investment in accounts receivable and inventory needed to support a $77,000 increase in sales?

 

e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?

 

Question 
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 
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 
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 
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?

 

 

Question 
If you borrow $6,000 at $800 interest for one year, what is your effective interest rate for the following payment plans? (Input your answers as a percent rounded to 2 decimal places.)  
 

Question 
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 2/18, net 60. Mr. Warner never takes the discount offered, but he pays his suppliers in 50 days rather than the 60 days allowed so he is sure the payments are never late.  
 

What is Mr. Warner's cost of not taking the cash discount? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 
The Reynolds Corporation buys from its suppliers on terms of 2/17, net 65. Reynolds has not been utilizing the discounts offered and has been taking 65 days to pay its bills.
 

Mr. Duke, Reynolds Corporation vice president, has suggested that the company begin to take the discounts offered. Duke proposes that the company borrow from its bank at a stated rate of 15 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement.

 

a. Calculate the cost of not taking a cash discount. (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. What is the effective rate of interest on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

c. Do you agree with Duke's proposal?

 

Question 
Neveready Flashlights Inc. needs $302,000 to take a cash discount of 2/19, net 71. A banker will loan the money for 52 days at an interest cost of $11,800.  
 

a. What is the effective rate on the bank loan? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. How much would it cost (in percentage terms) if the firm did not take the cash discount but paid the bill in 71 days instead of 19 days? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

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 $302,000?

 

e-1. What would be the effective interest rate in part d if the interest charge for 52 days were $11,300? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

e-2. Should the firm borrow with the 20 percent compensating balance requirement? (The firm has no funds to count against the compensating balance requirement.)

 

Question 
Summit Record Company is negotiating with two banks for a $158,000 loan. Fidelity Bank requires a compensating balance of 16 percent, discounts the loan, and wants to be paid back in four quarterly payments. Southwest Bank requires a compensating balance of 8 percent, does not discount the loan, but wants to be paid back in 12 monthly installments. The stated rate for both banks is 10 percent. Compensating balances will be subtracted from the $158,000 in determining the available funds in part a.
 

a-1. Calculate the effective interest rate for Fidelity Bank and Southwest Bank. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

 

a-2. Which loan should Summit accept?

 

b. Recompute the effective cost of interest, assuming that Summit ordinarily maintains $25,280 at each bank in deposits that will serve as compensating balances. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)

 

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

 

Question 
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 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 Charming as its annual loan rate.

 

a. Determine the maximum loan for which Charming Paper Company could qualify.

 

b. Determine how much one month’s interest expense would be on the loan balance determined in part a. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
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 2.2 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.  
 

a. What will be the profit or loss on the futures contract if interest rates increase to 12.50 percent by December when the contract is closed out?

 

b-1. After considering the hedging, what is the net cost to the firm of the increased interest expense of $72,000?

 

b-2. What percent of this $72,000 cost did the treasurer effectively hedge away? (Input your answer as a percent rounded to 2 decimal places.)

 

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

 

Question 
What is the present value of the following? Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. $8,100 in 14 years at 7 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. $16,800 in 9 years at 8 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. $26,500 in 20 years at 6 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
If you invest $15,250 today, how much will you have in each of the following instances? Use Appendix A as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. In 7 years at 9 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. In 18 years at 7 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. In 18 years at 10 percent? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

d. In 20 years at 10 percent (compounded semiannually)? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
Your uncle offers you a choice of $117,000 in 10 years or $60,000 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 8 percent, what is the present value of the $117,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

a-2. Which offer should you choose?

 

Question 
Your father offers you a choice of $100,000 in 10 years or $46,500 today. Use Appendix B as an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. If money is discounted at 8 percent, what is the present value of the $100,000? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

a-2. Which offer should you choose?

 

b-1. Now assume the offer is $100,000 in 7 years or $46,500 today. What is the present value of the $100,000 at 8 percent for 7 years? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b-2. Now, which offer should you choose?

 

Question 
How much would you have to invest today to receive the following? Use Appendix B or Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. $13,600 in 11 years at 8 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. $17,500 in 17 years at 13 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. $7,000 each year for 20 years at 8 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

d. $47,000 each year for 50 years at 17 percent. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
At a growth (interest) rate of 15 percent annually, how long will it take for a sum to double? To triple? Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
 

Question 
Determine the amount of money in a savings account at the end of 3 years, given an initial deposit of $11,500 and an annual interest rate of 12 percent when interest is compounded: Use Appendix A for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
 

Question 
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).
 

What is the future value of a 11-year annuity of $1,900 per period where payments come at the beginning of each period? The interest rate is 13 percent. Use Appendix C for an approximate answer, but calculate your final answer using the formula and financial calculator methods. To find the future value of an annuity due when using the Appendix tables, 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). (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
Your grandfather has offered you a choice of one of the three following alternatives: $10,000 now; $4,800 a year for eight years; or $56,000 at the end of eight years. Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a-1. Assuming you could earn 9 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

a-2. Which alternative should you choose?

 

b-1. If you could earn 10 percent annually, compute the present value of each alternative: (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

b-2. Which alternative should you choose?

 

Question 
You need $25,156 at the end of 7 years, and your only investment outlet is an 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 for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. What single payment could be made at the beginning of the first year to achieve this objective? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. What amount could you pay at the end of each year annually for 7 years to achieve this same objective? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
Franklin Templeton has just invested $10,160 for his son (age one). This money will be used for his son’s education 19 years from now. He calculates that he will need $103,673 by the time the boy goes to school.
 

What rate of return will Mr. Templeton need in order to achieve this goal? Use Appendix B for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
You wish to retire in 12 years, at which time you want to have accumulated enough money to receive an annual annuity of $27,000 for 17 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you can earn 10 percent on your money.
 

What annual contributions to the retirement fund will allow you to receive the $27,000 annuity? Use Appendix C and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
Del Monty will receive the following payments at the end of the next three years: $15,000, $18,000, and $20,000. Then from the end of the 4th year through the end of the 10th year, he will receive an annuity of $21,000 per year.
 

At a discount rate of 16 percent, what is the present value of all three future benefits? Use Appendix B and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

Question 
Your uncle borrows $62,000 from the bank at 12 percent interest over the ten-year life of the loan. Use Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.
 

a. What equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

b. How much of his first payment will be applied to interest? To principal? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

c. How much of his second payment will be applied to each? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

Question 
Your parents have accumulated a $160,000 nest egg. They have been planning to use this money to pay college costs to be incurred by you and your sister, Courtney. However, Courtney has decided to forgo college and start a nail salon. Your parents are giving Courtney $25,000 to help her get started, and they have decided to take year-end vacations costing $12,000 per year for the next four years. Use 7 percent as the appropriate interest rate throughout this problem. Use Appendix A and Appendix D for an approximate answer, but calculate your final answer using the formula and financial calculator methods.
 

a. How much money will your parents have at the end of four years to help you with graduate school, which you will start then? (Round your final answer to 2 decimal places.)

 

b. You plan to work on a master’s and perhaps a PhD. If graduate school costs $26,140 per year, approximately how long will you be able to stay in school based on these funds? (Round your final answer to 2 decimal places.)

 

Question 
Gulliver Travel Agencies thinks interest rates in Europe are low. The firm borrows euros at 8 percent for one year. During this time period the dollar falls 11 percent against the euro. What is the effective interest rate on the loan for one year? (Consider the 11 percent fall in the value of the dollar as well as the interest payment.) (Compute your answer from a U.S. perspective. Input your answer as a whole percent.)  
 

 

Question 
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 
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 
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $220,000. The company can borrow $220,000 for three years at 12 percent annual interest or for one year at 10 percent annual interest. Assume interest is paid in full at the end of each year.  
 

a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 10 percent rate? Compare this to the 12 percent three-year loan.

 

b. What if interest rates on the 10 percent loan go up to 15 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 12 percent, three-year loan?

 

Question 
Assume that Hogan Surgical Instruments Co. has $2,200,000 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 11 percent. If the firm goes with a short-term financing plan, the financing costs on the $2,200,000 will be 7 percent, and with a long-term financing plan, the financing costs on the $2,200,000 will be 9 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.

 

Question 
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 
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 
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 
Compute the cost of not taking the following cash discounts. (Use a 360-day year. Do not round intermediate calculations. Input your final answers as a percent rounded to 2 decimal places.)  
 

Question 
A pawnshop will lend $4,500 for 45 days at a cost of $35 interest.
 

What is the effective rate of interest? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 
Mary Ott is going to borrow $10,300 for 60 days and pay $231 interest.  
 

What is the effective rate of interest if the loan is discounted? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

Question 
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 6 percent and LIBOR 1.5 percent less. Also assume there will be a $40 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR).    
 

a. What is the effective interest rate on the LIBOR loan What is the dollar cost of the loan? (Use a 360-day year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

? (Use a 360-day year. Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. Which loan has the lower effective interest cost?

 

Question 
Talmud Book Company borrows $24,200 for 60 days at 15 percent interest.
 

What is the dollar cost of the loan? (Use a 360-day year. Do not round intermediate calculations and round your final answer to 2 decimal places.)

 

Question 
McGriff Dog Food Company normally takes 23 days to pay for average daily credit purchases of $9,590. Its average daily sales are $10,720, and it collects accounts in 29 days.  
 

a. What is its net credit position?

 

b-1. If the firm extends its average payment period from 23 days to 35 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.)

 

b-2. Has the firm improved its cash flow?

 

Question 
Carey Company is borrowing $175,000 for one year at 8.5 percent from Second Intrastate Bank. The bank requires a 18 percent compensating balance. The principal refers to funds the firm can effectively utilize (Amount borrowed − Compensating balance).   
 

a. What is the effective rate of interest? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

b. What would the effective rate be if Carey were required to make 12 equal monthly payments to retire the loan? (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)

 

Question 
Your company plans to borrow $12 million for 12 months, and your banker gives you a stated rate of 21 percent interest.  
 

Calculate the effective rate of interest for the following types of loans.  
a. Simple 21 percent interest with a compensating balance of 12 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)
 

b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.)

 

c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.)

 

d. Discounted interest with a compensating balance of 6 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.)