1. A firm that is located in New York receives on average 2,000 checks a day from its customers in the Twin Cities area. Average payment per check is $1,500. A bank in the Twin Cities is offering a lock-box arrangement for collection and processing of these checks at a cost of $0.50 per check. This arrangement will reduce the float by 2 days. The daily interest rate for the firm is 0.02%. What is the net saving from the lock-box arrangement?

2. What effective annual rate of interest is being charged to a customer who is granted credit terms of 3/15, net 45 when the customer foregoes the discount and pays on the last date prior to being delinquent?

3. What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 sale that has an 80% cost?

4. What is the daily net opportunity cost of holding a cash balance of $2.5 million, if the daily interest rate is 0.025% and the average transaction cost of investing money overnight is $50?

5. Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

6. Which one of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

7. A firm is considering a one-time sale of $100,000 to a customer. The cost of goods sold for this sale is $90,000. If the probability of the customer paying is 0.8, what is the expected profit from this transaction?

8. How much value would be added to a firm that could permanently reduce its collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

9. Firm Bs 1 million shares of stock currently sell for $12 each, but firm A is preparing a tender offer of $18 per share. Firm A estimates the gain of the merger to be $5 million. What percentage of the merger gains will be captured by firm Bs stockholders?

10. After analyzing the particulars of firms A and B and their proposed merger, comment on the desirability of the merger:

Firm A		Firm B
$16.00	Price per share	$10.00
8	P/E ratio	5
1,000	Shares outstanding	1,000

Firm A will purchase firm B by offering 625 shares of firm A. the merged firms are expected to be worth $26,000. Be sure to mention EPS of the merged entity, and so on.