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principles managerial finance

Questions and Answers of Principles Managerial Finance

11–16 Describe the basic procedures involved in using risk-adjusted discount rates (RADRs). How is this approach related to the capital asset pricing model (CAPM)?
11–15 To judge the sensitivity of a project’s NPV, financial managers will often compare a project’s forecasted cash inflows to the breakeven cash flows. Based on the information provided at
11–14 Describe how each of the following behavioral approaches can be used to deal with project risk: (a) scenario analysis and (b) simulation.
11–13 Define risk in terms of the cash flows from a capital budgeting project.How can determination of the breakeven cash inflow be used to gauge project risk?
11–12 Are most mutually exclusive capital budgeting projects equally risky? If you think about a firm as a portfolio of many different kinds of investments, how can the acceptance of a project
11–11 Explain how the terminal cash flow is calculated for replacement projects.
11–10 How are the incremental (relevant) operating cash flows that are associated with a replacement decision calculated?
11–9 How does depreciation enter into the calculation of operating cash flows? How does the income statement format in Table 11.6 relate to Equation 4.3 (on page 117) for finding operating cash
11–8 Referring to the basic format for calculating initial investment, explain how a firm would determine the depreciable value of the new asset.
11–7 What three tax situations may result from the sale of an asset that is being replaced?
11–6 How is the book value of an asset calculated? What are the two key forms of taxable income?
11–5 Explain how each of the following inputs is used to calculate the initial investment: (a) cost of new asset, (b) installation costs, (c) proceeds from sale of old asset, (d) tax on sale of old
11–4 How can currency risk and political risk be minimized when one is making foreign direct investment?
11–3 What effect do sunk costs and opportunity costs have on a project’s incremental cash flows?
11–2 What three components of cash flow may exist for a given project? How can expansion decisions be treated as replacement decisions? Explain.
11–1 Why is it important to evaluate capital budgeting projects on the basis of incremental cash flows?
1.. What would your options be when faced with the demands of an assertive CEO who expects you to “make it work”? Brainstorm several options The process of capital budgeting based on projected
LG 6 Select the best of a group of unequal-lived, mutually exclusive projects using annualized net present values (ANPVs), and explain the role of real options and the objective and procedures for
LG 5 Describe the determination and use of risk-adjusted discount rates (RADRs), portfolio effects, and the practical aspects of RADRs.
LG 4 Understand the importance of recognizing risk in the analysis of capital budgeting projects, and discuss risk and cash flows, scenario analysis, and simulation as behavioral approaches for
LG 3 Calculate the initial investment, operating cash flows, and terminal cash flow associated with a proposed capital expenditure.
LG 2 Discuss expansion versus replacement decisions, sunk costs, and opportunity costs.
LG 1 Discuss relevant cash flows and the three major cash flow components.
1.. Your company is considering manufacturing protective cases for a popular new smartphone.Management decides to borrow $200,000 from each of two banks, First American and First Citizen. On the day
P15–21 ETHICS PROBLEM Rancco, Inc., reported total sales of $73 million last year, including$13 million in revenue (labor, sales to tax-exempt entities) exempt from sales tax. The company collects
P15–20 Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured
P15–18 Accounts receivable as collateral, cost of borrowing Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that
P15–15 Cost of commercial paper Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of$1 million. The firm has
P15–14 Integrative: Comparison of loan terms Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank’s terms for a line of credit are
P15–13 Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $150,000 for 6 months. State Bank has offered to lend the funds at a 9%annual rate subject to a 10%
P15–12 Compensating balances and effective annual rates Lincoln Industries has a line of credit at Bank Two that requires it to pay 11% interest on its borrowing and to maintain a compensating
P15–11 Effective annual rate A financial institution made a $4 million, 1-year discount loan at 6% interest, requiring a compensating balance equal to 5% of the face value of the loan. Determine
P15–10 Unsecured sources of short-term loans John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of$45,000. John needs the money
P15–9 Cost of bank loan Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.)a. How much interest (in
P15–8 Spontaneous sources of funds, accruals When Tallman Haberdashery, Inc., merged with Meyers Men’s Suits, Inc., Tallman’s employees were switched from a weekly to a biweekly pay period.
P15–7 Changing payment cycle On accepting the position of chief executive officer and chairman of Muse, Inc., Dominic Howard changed the firm’s weekly payday from Monday afternoon to the
P15–5 Borrow or pay cash for an asset Bob and Carol Gibbs are set to move into their first apartment. They visited Furniture R’Us, looking for a dining room table and buffet.Dining room sets are
P15–4 Cash discount versus loan Joanne Germano works in an accounts payable department of a major retailer. She has attempted to convince her boss to take the discount on the 1/15 net 65 credit
P15–2 Cost of giving up cash discounts Determine the cost of giving up the cash discount under each of the following terms of sale. (Note: Assume a 365-day year.)a. 2/10 net 30b. 1/10 net 30c. 1/10
P15–1 Payment dates Determine when a firm must pay for purchases made and invoices dated on November 25 under each of the following credit terms:a. net 30 date of invoiceb. net 30 EOMc. net 45 date
E15–5 Horizon Telecom sold $300,000 worth of 120-day commercial paper for $298,000.What is the dollar amount of interest paid on the commercial paper? What is the effective 120-day rate on the
E15–4 Jackson Industries has borrowed $125,000 under a line-of-credit agreement. Although the company normally maintains a checking account balance of $15,000 in the lending bank, this credit line
E15–3 Jasmine Scents has been given two competing offers for short-term financing. Both offers are for borrowing $15,000 for 1 year. The first offer is a discount loan at 8%, and the second offer
E15–2 Cleaner’s, Inc., is switching to paying employees every 2 weeks rather than weekly and will therefore “skip” 1 week’s pay. The firm has 25 employees who work a 60-hour week and earn
E15–1 Lyman Nurseries purchased seeds costing $25,000 with terms of 3/15 net 30 EOM on January 12. How much will the firm pay if it takes the cash discount? What is the approximate cost of giving
15–14 For the following methods of using inventory as short-term loan collateral, describe the basic features of each, and compare their use: (a) floating lien, (b) trust receipt loan, and (c)
15–13 Describe and compare the basic features of the following methods of using accounts receivable to obtain short-term financing: (a) pledging accounts receivable and (b) factoring accounts
15–12 In general, what interest rates and fees are levied on secured short-term loans? Why are these rates generally higher than the rates on unsecured short-term loans?
15–11 Are secured short-term loans viewed as more risky or less risky than unsecured short-term loans? Why?
15–10 What is the important difference between international and domestic transactions? How is a letter of credit used in financing international trade transactions? How is “netting” used in
15–9 How do firms use commercial paper to raise short-term funds? Who can issue commercial paper? Who buys commercial paper?
15–8 What is a revolving credit agreement? How does this arrangement differ from the line-of-credit agreement? What is a commitment fee?
15–7 What is a line of credit? Describe each of the following features that are often included in these agreements: (a) operating-change restrictions,(b) compensating balance, and (c) annual
15–6 What are the basic terms and characteristics of a single-payment note?How is the effective annual rate on such a note found?
15–5 How does the effective annual rate differ between a loan requiring interest payments at maturity and another, similar loan requiring interest in advance?
15–4 How is the prime rate of interest relevant to the cost of short-term bank borrowing? What is a floating-rate loan?
15–3 What is “stretching accounts payable”? What effect does this action have on the cost of giving up a cash discount?
15–2 Is there a cost associated with taking a cash discount? Is there any cost associated with giving up a cash discount? How do short-term borrowing costs affect the cash discount decision?
15–1 What are the two major sources of spontaneous short-term financing for a firm? How do their balances behave relative to the firm’s sales?
1.. Why might financial managers still be tempted to manage earnings when a clawback is a legitimate possibility?On June 2, 2010, Diebold, Inc., agreed to pay a $25 million fine to settle accounting
LG 6 Describe the various ways in which inventory can be used as short-term-loan collateral.
LG 5 Explain the characteristics of secured short-term loans and the use of accounts receivable as short-term-loan collateral.
LG 4 Discuss the basic features of commercial paper and the key aspects of international short-term loans.
LG 3 Describe interest rates and the basic types of unsecured bank sources of short-term loans.
LG 2 Understand the effects of stretching accounts payable on their cost and the use of accruals.
LG 1 Review accounts payable, the key components of credit terms, and the procedures for analyzing those terms.
1.. The current balance in accounts receivable for Eboy Corporation is $443,000. This level was achieved with annual (365 days) credit sales of $3,544,000. The firm offers its customers credit terms
P14–18 ETHICS PROBLEM A group of angry shareholders has placed a corporate resolution before all shareholders at a company’s annual stockholders’ meeting. The resolution demands that the
P14–17 Management of cash balance Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest
P14–16 Zero-balance account Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As
P14–15 Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous
P14–14 Float Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 2.0 days. Once received,
P14–13 Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills
P14–12 Shortening the credit period A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline
P14–11 Initiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days.
P14–10 Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are
P14–9 Accounts receivable changes with bad debts A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the
P14–8 Accounts receivable changes without bad debts Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of
P14–6 EOQ, reorder point, and safety stock Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per
P14–5 EOQ analysis Tiger Corporation purchases 1,200,000 units per year of one component.The fixed cost per order is $25. The annual carrying cost of the item is 27% of its $2 cost.a. Determine the
P14–3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30
P14–2 Changing cash conversion cycle Camp Manufacturing turns over its inventory five times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The
P14–1 Cash conversion cycle American Products is concerned about managing cash efficiently.On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days.
E14–5 Klein’s Tools is considering offering a cash discount to speed up the collection of accounts receivable. Currently, the firm has an average collection period of 65 days, annual sales are
E14–4 Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a perunit sale price of $30. Bad
E14–3 Mama Leone’s Frozen Pizzas uses 50,000 pounds of cheese per year. Each pound costs $2.50. The ordering cost for the cheese is $250 per order, and its carrying cost is $0.50 per pound per
E14–2 Icy Treats, Inc., is a seasonal business that sells frozen desserts. At the peak of its summer selling season, the firm has $35,000 in cash, $125,000 in inventory,$70,000 in accounts
E14–1 Everdeen, Inc., has a 100-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its
ST14–3 Relaxing credit standards Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each.
ST14–2 EOQ analysis Thompson Paint Company uses 60,000 gallons of pigment per year.The cost of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1 per gallon
ST14–1 Cash conversion cycle Hurkin Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40
14–21 What two characteristics make a security marketable? Why are the yields on nongovernment marketable securities generally higher than the yields on government issues with similar maturities?
14–20 What are three mechanisms of cash concentration? What is the objective of using a zero-balance account (ZBA) in a cash concentration system?
14–19 What are the three main advantages of cash concentration?
14–18 What are the firm’s objectives with regard to collection float and to payment float?
14–17 What is float, and what are its three components?
14–16 Why should a firm actively monitor the accounts receivable of its credit customers? How are the average collection period and an aging schedule used for credit monitoring?
14–15 Why do a firm’s regular credit terms typically conform to those of its industry?
14–14 Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales?
14–13 What are the basic trade-offs in a tightening of credit standards?

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