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intermediate financial management

Questions and Answers of Intermediate Financial Management

13. Vesco-Zultch Corporation is a chain of appliance stores in Chicago. It needs to finance all of its inventories, which average the following during the four quarters of the year (in
b. A bad-debt expense of 1 percent on credit sales The firm's bank has recently offered to lend the firm up to 80 percent of the face value of the receivables shown on the schedule of accounts. The
a. $2,000 per month that would be required to support a credit department
12. The Bone Company has been factoring its accounts receivable for the past 5 years. The factor charges a fee of 2 percent and will lend up to 80 percent of the volume of receivables purchased for
b. The Zarlotti Finance Company will lend the company the money under a floating lien on all of its inventories. The rate is 23 percent, but no additional expenses will be incurred.
a. The Cody National Bank of Reno will lend against finished goods, provided that they are placed in a public warehouse under its control.As the finished goods are released for sale, the loan is
11. The Selby Gaming Manufacturing Company has experienced a severe cash squeeze and must raise $200,000 over the next 90 days. The company has already pledged its receivables in support of a loan.
10. Fritz-Polakoff Finance Company makes a variety of secured loans. Both the percentage of advance and the interest rate charged vary with the marketability, life, and riskiness of the collateral.
c. 6 percent loan on an add-on basis, with equal quarterly payments required on the initial face value.Which alternative has the lowest effective yield, using annual compounding for the first two and
b. 8.4 percent loan on a discount basis, with face value due at the end.
a. 9 percent loan on a collect basis, with face value due at the end.
9. Castellanos Company wishes to borrow $100,000 for 1 year. It must choose one of the following alternatives.
c. Issue commercial paper at 12 percent. The cost of placing the issue would be $100,000 each 6 months.Assuming that the firm would prefer the flexibility of bank financing, provided the additional
b. Borrow from the bank at 15 percent. This alternative would necessitate maintaining a 12 percent compensating balance.
a. Forgo cash discounts, granted on a basis of 3/10, net 30.
8. The Sphinx Supply Company needs to increase its working capital by $10 million. It has decided that there are essentially three alternatives of financing available:
7. Commercial paper has no stipulated interest rate. It is sold on a discount basis, and the amount of the discount determines the interest cost to the issuer. On the basis of the following
6. The Fox Company is able to sell $1 million of commercial paper every 3 months at a rate of 10 percent and a placement cost of $3,000 per issue. The dealers require Fox to maintain bank lines of
5. On January 1, Faville Car Company, a large car dealer, gave its employees a 10 percent pay increase in view of the substantial profits the preceding year. Before the increase, the weekly payroll
4. Recompute Problem 2, assuming a 10-day stretching of the payment date.What is the major advantage of stretching? What are the disadvantages?
3. Does the dollar size of the invoice affect the percentage annual interest cost of not taking discounts? Illustrate with an example.
d. 3/10, net 30 ($250 invoice).
c. 2/5, net 10 ($100 invoice).
b. 2/30, net 60 ($1,000 invoice).
a. 1/20, net 30 ($500 invoice).
2. Determine the annual percentage interest cost for each of the following terms of sale, assuming the firm does not take the cash discount but pays on the final day of the net period (assume a
b. Are there other considerations in addition to expected cost?
a. Determine the total dollar borrowing costs for short- and intermediateterm debt under each of the three alternatives for the coming year.(Assume there are no changes in current liabilities other
1. Mendez Metal Specialities, Inc., has a seasonal pattern to its business. It borrows under a line of credit from Central Bank at 1 percent over prime. Its total Chapter 16 Liability Management and
c. A field warehouse loan from another finance company at an interest rate of 10 percent annualized. The advance is 70 percent, and field warehousing costs amount to $10,000 for the 6-month period.
b. A floating lien arrangement from the supplier of the inventory at an effective interest rate of 20 percent. The supplier will advance the full value of the inventory.
a. Terminal warehouse receipt loan from a finance company. Terms are 12 percent annualized with an 80 percent advance against the value of the inventory. The warehousing costs are $7,000 for the
. The Kedzie Cordage Company needs to finance a seasonal bulge in inventories of $400,000. The funds are needed for 6 months. The company is considering the following possibilities:
c. A factor will buy the company's receivables ($100,000 per month), which have a collection period of 60 days. The factor will advance up to 75 percent of the face value of the receivables at 12
b. Bank loan: the firm's bank will lend $100,000 at 13 percent. A 10 percent compensating balance will be required, which otherwise would not be m;intainedby the company - ~
a. Trade credit: the company buys about $50,000 of materials per month on terms of 3/30, net 90. Discounts are taken.
4. The Barnes Corporation has just acquired a large account. As a result, it needs an additional $75,000 in working capital immediately. It has been determined that there are three feasible sources
3. The Halow Harp and Chime Company is negotiating a new labor contract.Among other things, the union is demanding that the company pay its workers weekly instead of twice a month. The payroll
c. If the firm could not borrow from the bank and was forced to resort to the use of trade credit funds, what suggestion might be made to Grind that would reduce the annual interest cost?512 Part V
b. What is the real cost of not taking advantage of the discount?
a. What mistake is Grind making?
2. The Dud Company purchases raw materials on terms of 2/10, net 30. A review of the company's records by the owner, Mr. Dud, revealed that payments are usually made 15 days after purchases are
A short-, All unsecured $1,400,000 $300,000 $200,000 medium-, t long-term debt B 3 short-, Unsecured 1,520,000 250,000 150,000 + medium-, Secured + long-term debt Unsecured C short-, Unsecured
1. The Hollezorin Company must decide among three liability strategies, which differ in maturity structure and type of securities. For each strategy, the annual interest costs, the annual flotation
The opportunity cost is greater than the savings. Therefore, the new production plan should not be undertaken.
4. Inventories after change = $48 million/6 = $8 million Present inventories = $48 million/8 = $6 million Additional inventories $2 million Opportunity cost = $2 million X .15 = $300,000
C.C h a p t e r 15 M a n a g e m e n t of A c c o u n t s R e c e i v a b l e a n d I n v e n t o r i e s 481 The lower the order cost, the more important carrying costs become relatively and the
b.Since the lot size is 1,000 filters, the company would order 6,000 filters each time. The lower the carrying cost, the more important ordering costs become relatively, and the larger the optimal
3. a.Carrying costs = $.I0 x 1,000 = $100. The optimal order size would be 4,000 filters, which represents five orders a month.
To save $4,800 in bad-debt losses by identifying the high-risk category of new orders, the company must spend $8,000. Therefore, it should not undertake the credit analysis of new orders. This is a
Number of orders = $100,000/$50 = 2,000; credit analysis cost = 2,000 X $4 =$8,000.
2. As the bad-debt loss ratio for the high-risk category exceeds the profit margin of 22 percent, it would be desirable to reject orders from this risk class if such orders could be identified.
1. Receivable turnover = 360/75 = 4.8 Profitability of additional sales = $9 million X .2 = $1,800,000 Additional receivables associated with the new sales= $9 million/4.8 = $1,875,000 Additional
Carrying costs are 5.65 per gallon per year. What is the best level of safety stock for the company?Solutions to S e l f - correction Problems
11. Fouchee Scents, Inc., makes various scents for use in the manufacture of food products. Although the company does maintain a safety stock, it has a policy of "lean" inventories, with the result
b. The vendor now offers Favorite Foods a quantity discount of $.02 per box if it buys cones in order sizes of 10,000 boxes. Should Favorite Foods avail itself of the quantity discount? (Hint:
a. Determine the optimal order quantity.
c. How many times per year would inventory be ordered?Chapter 15 Management of Accounts Receivable and Inventories 479 l0 Favorite Foods, Inc buys 50,000 boxes of ice cream cones every 2 months to
b. What are total inventory costs for Hedge (carrying costs plus ordering costs)?
a. Determine the economic order quantity of dints.
9. The Hedge Corporation manufactures only one product: planks. The single raw material used in making planks is the dint. For each plank manufactured, 12 dints are required. Assume that the company
b. Determine the economic order quantity.
a. Determine the total costs associated with ordering 1, 2, 5, 10, and 20 times a year.
8. A college bookstore is attempting to determine the optimal order quantity for a popular book on psychology. The store sells 5,000 copies of this book a year at a retail price of $12.50, although
b. (1) If its costs were 74 percent of the selling price, would the order be accepted? (2) If 65 percent?
a. On the basis of this information, should Quigley accept the order?
Analyze the San Jose Company's application for credit. What positive factors are present? What negative factors are present?The Quigley Company sells and installs ski lifts. It has received an order
The San Jose Company has a Dun & Bradstreet rating of 4A-2. Inquiries into its banking disclosed balances generally in the low seven figurrs. Five suppliers to San Jose revealed that the firm takes
6. The Pottsville Manufacturing Corporation is considering extending trade credit to the San Jose Company. Examination of the records of San Jose has produced the following financial statements:San
5. Porras Pottery Products, Inc., spends $220,000 per annum on its collection department. The company has $12 million in credit sales, its average collection period is 23 months, and the percentage
4. The Chickee Corporation has a 12 percent opportunity cost of funds and currently sells on terms of net 10, EOM. This means that goods shipped before the end of the month must be paid for by the
3. Recalculate Problem 2, assuming the following pattern of bad-debt losses:Which policy now is best?
2. Upon reflection, Jefferson Knu Monroe Company has estimated that the following pattern of bad-debt losses will prevail if it initiates more liberal credit terms:Increase in sales Credit ~olicv 1A
1. To increase sales from their present annual $24 million, Jefferson Knu Monroe Company, a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of
4. To reduce production start-up costs, Bodden Truck Company may manufacture longer runs of the same truck. Estimated savings from the increase in ef476 Part V Liquidity and Working Capital
c. What would be the optimal order quantity if ordering costs were $lo?
b. What would be the optimal order quantity if the carrying cost were$.05 a filter per month?
a. What is the optimal order quantity with respect to so many lot sizes?
3. Vostick Filter Company is a distributor of air filters to retail stores. It buys its filters from several manufacturers. Filters are ordered in lot sizes of 1,000, and each order costs $40 to
2. Matlock Gauge Company makes wind and current gauges for pleasure boats.The gauges are sold throughout the southeast to boat dealers, and the average order size is $50. The company sells to all
1. Durham-Feltz Corporation presently gives terms of net 30 days. It has $60 million in sales, and its average collection period is 45 days. To stimulate demand, the company may give terms of net 60
The floating-rate preferred is the most attractive after taxes, owing to the 70 percent exemption for federal income tax purposes. Commercial paper is less attractive than Treasury bills because of
c. Since the opportunity cost of the present system ($87,500) exceeds the cost of the lockbox system ($75,000), the system should be initiated.Federal State Combined After- Tax Security Tax Tax
b. 5% X $1,750,000 = $87,500
2.a. Total time savings = %days Time savings X Daily average collection = Reduction in cash balances achieved
f. Eurodollars 1 2 3 4 5 6 7 Evaluate the yield-risk trade-off for each instrument. Consider the appropriateness of each of these securities for the corporation's short-term investment
e. Government agency issues
d. Commercial paper
c. Certificates of deposit
b. Bankers' acceptances
a. Treasury bills
5. Research Project: Examine quotations in the Wall Street Journal for each of the following money market instruments:
b. If the opportunity cost of funds were 5 percent, what would be the optimal strategy?
a. If the opportunity cost of funds is 10 percent, which transfer procedure should be used for each of the restaurants?
4. Topple Tea Houses, Inc., operates seven restaurants in the state of Pennsylvania.The manager of each restaurant transfers funds daily from the local bank Chapter 14 L i q u i d i t y , Cash, and
3. The Frazini Food Company has a weekly payroll of $150,000, paid on Friday.On average, its employees cash their checks in the following manner:Day Check Cleared on Percent of Company's Account
b. In an effort to retain the business, the New Orleans bank has offered to handle the collections strictly on a fee basis (no compensating balance).What would be the maximum fee the New Orleans bank
a. The List Company has discovered that it could divide the southern region into a southwestem region (with $1 million a day in collections, which could be handled by a Dallas bank for a $1 million
2. The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its southem customers. The bank handles $3 million a day in
c. Rather than mail checks to its bank, the company could deliver them by messenger service. This procedure would reduce the overall delay by 1 day and cost $10,300 annually. Should the company

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