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Questions and Answers of Corporate Finance

Calculating Cash Collections the Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $340.
Calculating Cycles Consider the following financial statement information for the Bulldog Icers Corporation: Calculate the operating and cash cycles. How do you interpret your answer?
Factoring Receivables your firm has an average collection period of 38 days. Current practice is to factor all receivables immediately at a 2 percent discount. What is the effective cost of borrowing
Calculating payments iron man products had projected the following sales for the coming year. Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate
Calculating payments the Thunder Dan Corporation??s purchases from suppliers in a quarter are equal to 75 percent of the next quarter??s forecast sales. The payables period is 60 days. Wages, taxes,
Calculating Cash Collections the following is the sales budget for Duck-n-Run, Inc., for the first quarter of 2006.Credit sales are collected as follows:65 percent in the month of the sale20 percent
Calculating the Cash Budget here are some important figures from the budget of Nashville Nougats, Inc., for the second quarter of 2006.The company predicts that 5 percent of its credit sales will
Costs of borrowing you’ve worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .72 percent per month. In addition, 4 percent of
Costs of Borrowing A bank offers your firm a revolving credit arrangement for up to $80 million at an interest rate of 1.90 percent per quarter. The bank also requires you to maintain a compensating
Cash Management Policy rework Problem 15 assuming:a. Wildcat maintains a minimum cash balance of $50 million.b. Wildcat maintains a minimum cash balance of $20 million.Based on you answer in (a) and
Costs of Borrowing in exchange for a $400 million fixed commitment line of credit your firm has agreed to do the following.1. Pay 1.6 percent per quarter on any funds actually borrowed.2. Maintain
Costs of Borrowing Come and Go Bank Offers your firm a 9 percent discount interest loan for up to $15 million, and in addition requires you to maintain a 5 percent compensating balance against the
Cash management is it possible for a firm to have too much cash? Why would shareholders care if a firm accumulates large amount of cash?
Cash management what options are available to a firm if r believes it has too much cash? How about too little?
Motivations for holding cash in the chapter opening, we have discussed the enormous cash position of several companies. Why would firms such as these hold such large quantities of cash?
Cash management versus liquidity management what is the difference between cash management and liquidity management?
Short-tern investments why is referred stock with a dividend tied to short-tern interest rates an attractive short-term investment for corporations with excess cash?
Collection and disbursement floats which would a firm prefer: a net collection float or a net disbursement float? Why?
Float suppose a firm has a book balance of $ 2 million. At the automatic teller machine (ATM), the cash manager finds out that the bank balance is $2.5 million. What is the situation here? If this is
Short-term investments for each if the short-term marketable securities given here provide an example of the potential disadvantages the investment has for meeting a corporation’s cash management
Agency issues It is sometimes argued that excess cash held by a firm can aggravate agency problems and, more generally, reduce incentives for shareholder wealth maximization how would you frame the
Use of excess cash one option a firm usually has with any excess cash is to pay its suppliers more quickly. What are the advantages and disadvantages of this use of excess cash?
Use of excess cash another option usually available is to reduce the firm’s outstanding debt. What are the advantages and disadvantages of this use of excess cash?
Float an unfortunately common practice goes like this, suppose you are out of money in your checking account; however, your local grocery store will, as convenience to you as a customer, cash a check
Calculating Float in a typical month, the Timemons Corporation receives 90 checks totaling $ 135,000. These are delayed five days on average. What is the average daily float?
Calculating net float each business day, on average, a company writes checks totaling $17,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is
Costs of Float Purple feet wine, Inc., receives an average of $11,000 in checks per day. The delay in clearing is typically four days. The current interest rate is .016 percent per day.a. What is the
Float and Weighted Average Delay your neighbor goes to the post office once a month and picks up two checks, one for $13,000 and one for $4,000. The larger check takes four days to clear after it is
NPV and Collection time your firm has an average receipt size of $95. A ban has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically
Using weighted average Delay a mail-order firm processes 4,500 checks per month. Of these, 60 percent are for $50 and 40 percent are for $70. The $50 checks are delayed two days on average; the $70
Value of Lockboxes paper submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following.The total collection time will be reduced by three
Lockboxes and Collection it takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to
Value of Delay no more pencils, Inc., disburses checks every two weeks that average $57,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of
NPV and Reducing Float No more books corporation has an agreement with Lollipop Bank whereby the bank handles $6 million in collections a day and requires a $450,000 compensating balance. No more
Lockboxes and Collection time Bird's Eye Tree houses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using
Calculating Transactions Required Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections form its customers located on the
Changes in Target Cash Balances indicate the likely impact of each of the following on a company’s target cash balance. Use the letter I to denote an increase and D to denote a decrease. Briefly
Using the BAR Model given the following information, calculate the target cash balance using the BAT model: how do you interpret your answer?
Opportunity versus Trading Costs White Whale Corporation has an average daily cash balance of $900. Total cash needed for the year is #37,000. The interest rate is 5 percent, and replenishing the
Costs and the BAT Model Debit and credit bookkeepers needs a total of $7,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells $450 in securities and
Determining Optimal Cash Balances the all day Company is currently holding $670,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by $125,000 per month. How
Interpreting Miller-Orr Econoline Crush, Inc., uses a Miller-Orr cash management approach with a lower limit of $50,000, an upper limit of $130,000 and a target balance of $75,000. Explain what each
Using Miller-Orr Slap Shot Corporation has a fixed cost associated with buying and selling marketable securities of $75. The interest rate is currently .021 percent per day, and the firm has
Interpreting Miller-Orr based on the Miller-Orr model describe what will happen to the lower limit, the upper limit, and the spread (the distance between the two) if the variation in net cash flow
Using Miller-Orr the variance of the daily cash flows for the Pele Bicycle Shop is $840,000. The opportunity cost to the firm of holding cash is 7 percent per year. What should the target cash level
Using bat all night corporations has determined that its target cash balance if it uses the BAT model is $2,600. The total cash needed for the year is $23,000, and the order cost is $10. What
Credit Instruments Describe each of the following:a. Sight draftb. Time draft.c. Banker’s acceptance.d. Promissory note.e. Trade acceptance.
Trade Credit Forms in what form is trade credit most commonly offered? What is the credit instrument in this case?
Receivables Costs what costs are associated with carrying receivables? What costs are associated with not granting credit? What do we call the sum of the costs for different levels of receivables?
Five CS of Credit what are the five Cs of credit explain why each is important.
Credit Period Length what are some of the factors that determine the length of the credit period? Why the length of the buyer is’s operating cycle often considered an upper bound on the length of
Credit Period Length in each of the following pairings, indicate which firm would probably have a longer credit period and explain your reasoning.a. Firm A sells a miracle cure for baldness: Firm B
Inventory Types what are the different inventory types? How do the types differ? Why are some types said to have dependent demand whereas other types are said to have independent demand?
Just-in-Time Inventory if a company moves to a JIT inventory management system, what will happen to inventory turnover? What will happen to total asset turnover? What will happen to return on equity
Inventory Costs if a company’s inventory carrying costs are $5 million per year and its fixed order costs are $8 million per year, do you think the firm keeps too much inventory on hand or too
Inventory Period at least part of Dell’s corporate profits can be traced to its inventory management. Using just-in-time inventory, Dell typically maintains an inventory of three to four days’
Cash Discounts you place an order for 300 units of inventory at a unit price of $115. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you
Size of Accounts Receivable the Wind Surfer Corporation has annual sales of $57 million. The average collection period is 39 days. What is the Surfer Corporation has annual sales of $57 million. The
AACP and Accounts Receivable Kyoto Joe, Inc, sells earnings forecasts for Japanese securities. Its credit terms are 2/10, net 30. Based on experience, 70 percent of all customers will take the
Size of Accounts Receivable wave Runner, inc., has weekly credit sales of $23,000, and the average collection period is 32 days. The cost of production is 80 percent of the selling price. What is
Terms of Sale a film offers terms of 2/10, net 35. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculation, explain what will
ACP and Receivables Turnover Music City, Inc, has an average collection period of 42 days. Its average daily investment in receivables is $43,000. What are annual credit sales? What is the
Size of Accounts Receivable Essence of Skunk Fragrances, Ltd., sells 4,500 units of its perfume collection each year at a price per unit of $400. All sales are on credit with terms of 2/10, net 40.
Size of accounts receivable the turn it up corporation sells on credit terms of net 30. Its accounts are, on average, 7 days past due. If annual credit sales are $8 million, what is the company’s
Evaluating Credit Policy Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass
Credit Policy Evaluation Quest, Inc., is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Quest
EOQ Redon Manufacturing uses 2,500 switch assemblies per week and then reorders another 2,500. If the relevant carrying cost per switch assembly is $10, and the fixed order cost is $2,400, is
EOQ the Trektronics store begins each week with 450 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $37 per year and the fixed order cost is $125,
EOQ Derivation prove that when carrying costs and restocking costs are as described in the chapter, the EOQ must occur at the point where the carrying costs and restocking costs are equal.
Credit Policy Evaluation the Dilana Corporation is considering a change in its cash-only policy. The new terms would be not one period. Based on the following information, determine if Dilana should
Credit Policy Evaluation happy times currently have an all-each credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following
Credit Policy the Silver spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a
Break Even Quantity in problem 14, what is the break-even quantity for the new credit policy?
Credit Markup in problem 14, what is the break-even price per unit that should be charged under the new credit policy? Assume that the sales figure under the new policy is 4,200 units and all other
Credit Markup in problem 15, what is the break-even price per unit under the new credit policy? Assume all other values remain the same.
Safety Stocks and Order Points Sache, Inc expects to sell 700 of its designer suits every week. The store is open seven days a week and expects to sell the same number of suits every day. The company
Spot and Forward Rates suppose the exchange rate for the Swiss franc is quoted as SF 1.50 in the spot market and SF 1.53 in the 90-day forward market.a. Is the dollar selling at a premium or a
Purchasing Power Parity suppose the rate of inflation in Mexico will run about 3 percent higher than the U.S, inflation rate over the next several years, all other things being the same, what will
Exchange Rates the exchange rate for the Australian dollar is currently A $1.40. This exchange rate is expected to rise by 10 percent over the next year.a. Is the Australian dollar expected to get
Yankee Bonds Which of the following most accurately describes a Yankee bond?a. A bond issued by General Motors in Japan with the interest payable in U.S dollars.b. A bond issued by General Motors in
Exchange Rates are exchange rate changes necessarily good or bad for a particular company?
International Risks at one point, Duracell International confirmed that it was planning to open battery-manufacturing plants in China and India. Manufacturing in these countries allows Duracell to
Multinational Corporation given that many multinationals based in many countries have much greater sales outside their domestic markets than within them, what is the particular relevance of their
Exchange Rate Movements are the following statements true or false? Explain why.a. If the general price index in Great Britain rises faster than that in the United States, we would expect the pound
Exchange Rate Movements some countries encourage movements in their exchange rate relative to those of some other country as a short-term means of addressing foreign trade imbalances. For each of
International Capital Market Relationships we discussed five international capital market relationships: relative PPP, IRP, UFR, UIP, and the international Fisher effect. Which of these would you
Using Spot and Forward Exchange Rates suppose the spot exchange rate for the Canadian dollar is Can $1.15 and the six-month forward rate is Can $1.19.a. Which is worth more, a U.S. dollar a Canadian
A particle moves with velocity v = 8t − 7, where v is in meters per second and t is in seconds.(a) Find the average acceleration for the one-second intervals beginning at t = 3 s and t = 4 s.(b)
Interest Rates and Arbitrage the treasurer of a major U.S firm has $30 million to invest for three months. The annual interest rate in the United States is .48 percent per month. The interest rate in
Inflation and Exchange Rates suppose the current exchange rate for the Polish zloty is Z 3.18. The expected exchange rate in three years is Z 3.27. What is the difference in the annual inflation
Exchange Rates and Arbitrage suppose the spot and six-month forward rates on the Norwegian krone are Kr 6.18 and Kr 6.60, respectively. The annual risk-free rate in the United States is 5 percent,
The International Fisher Effect you observe that the inflation rate in the United States is 3.7 percent per year and that T-bills currently yield 4.3 percent annually. What do you estimate the
Spot versus Forward Rates suppose the spot and three-month forward rates for the yen are ¥120.43 and ¥ 122.68, respectively.a. Is the yen expected to get stronger or weaker?b. What would you
Expected Spot Rate suppose the spot exchange rate for the Hungarian forint is HUF 221.53, the inflation rate in the United States will be 4.9 percent per year. It will be 8.6 percent in Hungary.
Capital Budgeting Lakonishok Equipment has an investment opportunity in Europe. The project costs Є 12 million and is expected to produce cash flows of Є2.7 million in year 1, Є3.5 million in year
Capital budgeting you are evaluating a proposed expansion of an existing subsidiary located in Switzerland. The cost of the expansion would be SF 27.0 million. The cash flows from the project would
Translation Exposure Betancourt International has operations in Arrakis. The balance sheet for this division in Arrakeen Solaris shows assets of 15,000 Solaris, debt in the amount of 6,000 Solaris,
Translation Exposure in the previous problem, assume the equity increases by 1.100 Solaris due to retained earnings. If the exchange rate at the end of the year is 1.24 Solaris per dollar, what does
Using the Exact International Fisher Effect from our discussion of the Fisher effect in chapter, we know that the actual relationship between a nominal rate, R, a real rate, r, and an inflation
Write down the formulas for an investment’s NPV and rate of return. Prove that NPV is positive only if the rate of return exceeds the opportunity cost of capital.

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