Questions and Answers of Fundamentals Of Financial Management 10th

7. A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should the financial manager recognize as the true cost of
6. What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?
5. What does LIBOR mean? Is LIBOR normally higher or lower than the U.S.prime interest rate?
3. How have new banking laws influenced competition?What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?
2. Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
1. Under what circumstances would it be advisable to borrow money to take a cash discount?
Logan Distributing Company of Atlanta sells fans and heaters to retail outlets through- ~Logan Distributing out the Southeast. Joe Logan, the president of the company, is thinking about changing
Logan Distributing Company of Atlanta sells fans and heaters to retail outlets through- ~Logan Distributing out the Southeast. Joe Logan, the president of the company, is thinking about changing
Assume that the new trade terms of 2/10, net 30 will increase sales by 15 percent because the discount makes Dome’s price competitive. If Dome earns 20 percent on sales before discounts, should it
If Dome reduces its bank loans, which cost 10 percent, by the cash generated from reduced receivables, what will be the net gain or loss to the firm (don’t forget the 2 percent discount)? Should it
If Dome offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $144,000 for
Dome Metals has credit sales of $144,000 yearly with credit terms of net Credit policy 30 days, which is also the average collection period. Dome does not offer decision with a discount for early
In Problem 19, if inventory turnover had only been 4 times: Continuation ofa. What would be the new value for inventory investment? Problem 19b. What would be the return on investment? You need to
Global Services is considering a promotional campaign that will increase annual credit sales by $400,000. The company will require investments in accounts receivable, inventory, and plant and
Reconsider Problem 17c. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended?
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 8 percent of the new accounts will be uncollectible.Collection costs are 5 percent of new
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new
Wisconsin Snowmobile Corp. is considering a switch to level production.Cost efficiencies would occur under level production, and aftertax costs would decline by $30,000, but inventory costs would
Diagnostic Supplies has expected sales of 135,000 units per year, a carrying cost of $3 per unit, and an ordering cost of $4 per order.a. What is the economic order quantity?b. What is average
In the second year, Fisk Corporation finds that it can reduce ordering costs to $2 per order but that carrying costs stay the same at $1.20. Also, volume remains at 75,000 units.a. Recomputea, b,c,
Fisk Corporation is trying to improve its inventory control system and has installed quantity an online computer at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering
Midwest Tires has expected sales of 12,000 tires this year, an ordering cost of quantity $6 per order, and carrying costs of $1.60 per tire.a. What is the economic ordering quantity?b. How many
Route Canal Shipping Company has the following schedule for aging of accounts receivable accounts receivable:a. Fill in column (4) for each month.b. If the firm had $1,440,000 in credit sales over
Mervyn’s Fine Fashions has an average collection period of 40 days. The of credit sales accounts receivable balance is $80,000. What is the value of its credit sales?
In Problem 6, if accounts receivable change in 2007 to $140,000, while credit sales are $1,440,000, should we assume the firm has a more or a less lenient credit policy? Hint: Recompute the average
Barney’s Antique Shop has annual credit sales of $1,080,000 and an average balance collection period of 40 days in 2007. Assume a 360-day year. What is the company’s average accounts receivable
Sanders’ Prime Time Company has annual credit sales of $1,800,000 and accounts ~—A verage collection receivable of $210,000. Compute the value of the average collection period.
Postal Express has outlets throughout the world. It also keeps funds for International transactions purposes in many foreign countries. Assume that in 2007 it held cash management 200,000 reals in
Neon Light Company of Kansas City ships lamps and lighting appliances Cost-benefit throughout the country. Ms. Neon has determined that through the establish- analysis of cash ment of local
Beth’s Society Clothiers, Inc., has collection centers across the country to speed = Cost-benefit up collections. The company also makes payments from remote disbursement analysis of cash centers
Porky’s Sausage Co. shows the following values on its corporate books.The initial amount on the bank’s books is also $10,000. However, only $70,000 in deposits have been recorded and only $25,000
11. If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?
10. Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?
9. What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?
8. What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid?
7. What are three quantitative measures that can be applied to the collection policy of the firm?
6. Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
5. Why are Treasury bills a favorite place for financial managers to invest excess cash?
Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-3. Which security would you choose for a short-term
3. Why would a financial manager want to slow down disbursements?
2. Explain the similarities and differences of lockbox systems and regional collection offices.
1. Inthe management of cash and marketable securities, why should the primary Questions concern be for safety and liquidity rather than maximization of profit?
Given that efficient working capital management should lead to better profitability, write up a short analysis of the three companies’ working capital management and how it might affect each
Which of the three segments (McGraw-Hill Education, Financial Services, or Information and Media Services) appears to be the most sensitive in quarterly performance? Compute McGraw-Hill Education’s
Esquire Products, Inc., expects the following monthly sales:e. Determine total current assets for each month. Include cash, accounts receivable, and inventory. Accounts receivable equal sales minus
Bombs Away Video Games Corporation has forecasted the following monthly sales:Bombs Away Video Games sells the popular Strafe and Capture video game cartridge. It sells for $5 per unit and costs $2
Garza Electronics expects to sell 500 units in January, 250 units in February, and 1,000 units in March. December’s ending inventory is 700 units. Expected sales for the year are 7,200 units. Garza
In Problem 15, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? Hint: Divide the interest payments in
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: January ess $8,000 April $8,000 February 2,000 May. 9,000 March 3,000 June 4,000 Short-term
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 data at the
Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent current assets. In addition, the firm has $600,000 invested in fixed assets.a. Lear wishes to finance all fixed
Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $300,000 in temporary current assets and $200,000 in permanent current assets. Collins also has $400,000 in fixed
In Problem 10, assume the term structure of interest rates becomes inverted, with short-term rates going to 12 percent and long-term rates 4 percentage points lower than short-term rates.If all other
Winfrey Diet Food Corp. has $4,500,000 in assets.Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $960,000. The tax rate is 40 percent.If
Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with Optimal policy mix a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity
Assume that Hogan Surgical Instruments Co. has $2,000,000 in assets. If it goes © Optimal policy mix with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a
Boatler Used Cadillac Co. requires $800,000 in financing over the next two years. The firm can borrow the funds for two years at 9 percent interest per year. Mr. Boatler decides to do economic
Antonio Banderos & Scarves sells headwear that is very popular in the fallwinter season. Units sold are anticipated as: October 1,000 November. 2,000 December 4,000 January 3,000 10,000 units If
Antivirus, Inc., expects its sales next year to be $2,000,000. Inventory and accounts receivable will increase by $430,000 to accommodate this sales level. The company has a steady profit margin of
Cobb Tie Shops, Inc., expects sales next year to be $300,000. Inventory and accounts receivable will increase by $60,000 to accommodate this sales level.The company has a steady profit margin of 10
Sharpe Knife Company expects sales next year to be $1,500,000 if the Expected value economy is strong, $800,000 if the economy is steady, and $500,000 if the economy is weak. Mr. Sharpe believes
Austin Electronics expects sales next year to be $900,000 if the economy is Expected value strong, $650,000 if the economy is steady, and $375,000 if the economy is weak. The firm believes there is a
Otis Resources is trying to develop an asset-financing plan. The firm has$200,000 in temporary current assets and $500,000 in permanent current assets.Otis also has $300,000 in fixed assets.a.
Meyer Electronics expects sales next year to be $3,000,000 if the economy is Solutions strong, $1,200,000 if the economy is steady, and $800,000 if the economy is weak. Mr. Meyer believes there is a
10. Since the mid-1960s, corporate liquidity has been declining. What reasons can you give for this trend?
9. What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
8. What does the term structure of interest rates indicate?
7. A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
6. By using long-term financing to finance part of temporary current assets, a firm may have less risk but lower returns than a firm with a normal financing plan.Explain the significance of this
5. “The most appropriate financing pattern would be one in which asset buildup and length of financing terms are perfectly matched.” Discuss the difficulty involved in achieving this financing
4. How is a cash budget used to help manage current assets?
3. What is the significance to working capital management of matching sales and production?
2. Discuss the relative volatility of short- and long-term interest rates.
Explain how rapidly expanding sales can drain the cash resources of a firm. Questions
24. Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:The company is currently financed with 50 percent debt and 50 percent equity
23. Mr. Gold is in the widget business. He currently sells 1 million widgets a year at $5 each. His variable cost to produce the widgets is $3 per unit, and he has$1,500,000 in fixed costs. His
22. The Lopez-Portillo Company has $10 million in assets, 80 percent financed by debt and 20 percent financed by common stock. The interest rate on the debt is 15 percent and the par value of the
21. Edsel Research Labs has $24 million in assets. Currently half of these assets are financed with long-term debt at 8 percent and half with common stock having a par value of $10. Ms. Edsel, the
20. Dickinson Company has $12 million in assets. Currently half of these assets are financed with long-term debt at 10 percent and half with common stock having a par value of $8. Ms. Smith,
19. The Norman Automatic Mailer Machine Company is planning to expand production because of the increased volume of mailouts. The increased mailout capacity will cost $2,000,000. The expansion can be
18. Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: Capital Structure Sinclair
17. Firms in Japan often employ both high operating and financial leverage because of the use of modern technology and close borrower-lender relationships.Assume the Mitaka Company has a sales volume
16. Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $120,000.The separate capital structures for Sterling and Royal are
15. In Problem 14, compute the stock price for Cain if it sells at 18 times earnings per share and EBIT is $40,000.
14. Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.a. Compute earnings per share if
13. U.S. Steal has the following income statement data: Total Operating Units Sold Variable Fixed Total Costs Costs Costs Total Revenue Income (Loss) 40.000 $ 80,000 $50,000 $130,000 $160,000 $30,000
12. United Snack Company sells 50-pound bags of peanuts to university dormitories for $10 a bag. The fixed costs of this operation are $80,000, while the variable costs of peanuts are $.10 per
11. Mo & Chris’s Delicious Burgers, Inc., sells food to Military Cafeterias for$15 a box. The fixed costs of this operation are $80,000, while the variable cost per box is $10.a. What is the
10. The Harding Company manufactures skates. The company’s income statement for 2007 is as follows:Given this income statement, compute the following:a. Degree of operating leverage.b. Degree of
9. The Sterling Tire Company’s income statement for 2007 is as follows:Given this income statement, compute the following:a. Degree of operating leverage.b. Degree of financial leverage.c. Degree
8. Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,400,000, but 15 percent of this value is
7. Calloway Cab Company determines its break-even strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $400,000, but 20 percent of this value is represented by
6. Jay Linoleum Company has fixed costs of $70,000. Its product currently sells for $4 per unit and has variable costs per unit of $2.60. Mr. Thomas, the head of manufacturing, proposes to buy new
5. Eaton Too] Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per unit.a. Compute the break-even point.b. Ms. Eaton comes up with a new plan to cut fixed
4. Draw two break-even graphs—one for a conservative firm using labor-intensive production and another for a capital-intensive firm. Assuming these companies compete within the same industry and
3. Therapeutic Systems sells its products for $8 per unit. It has the following costs:Separate the expenses between fixed and variable costs per unit. Using this information and the sales price per
2. The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez’s autograph stamped on them. Each bat sells for $13 and has a variable cost of $8.There are $20,000 in fixed costs
3. Shock Electronics sells portable heaters for $25 per unit, and the variable cost to produce them is $17. Mr. Amps estimates that the fixed costs are $96,000.a. Compute the break-even point in
2. Hubball Resources has the following capital structure:a. Compute earnings per share if earnings before interest and taxes is $64,000.(Assume a 20 percent tax rate.)b. Assume debt goes up by
1. Meyer Appliance Company makes cooling fans. The firm’s income statement is as follows: Sales (7,000 fans at $20) Less: Variable costs (7.000 fans at $8). Fixed costs Earnings before interest and

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