1.

Eli Lilly sales for his nursery and plant company is $560,000. Elis net assets (assets liabilities) will be at 50 percent of sales. His firm will enjoy an 8 percent return on total sales. He will begin the year with $120,000 in the bank. If there is no increase in sales and all other facts remain the same, what would be Elis ending cash balance?

Ending cash $

2.

First Picked Fruits Inc. is considering two alternatives to stimulate sales. Currently, the policy is net 30 and the average collection period is 40 days, with bad debt losses of 1.25 percent of sales. All sales are credit sales and are expected to be $6.1 million annually under this policy.

Under policy 1, credit terms would be lengthened to 45 days to a select group of new customers, with an expected increase in sales to $6.9 million annually. However, it is expected that the incremental sales would experience bad debt losses of 1.75 percent and that their average collection period would be 50 days. No change would occur in the average collection period or bad debt loss experience on the existing credit sales.

Under policy 2, credit terms would be lengthened to 60 days to a select group of new customers (not completely overlapping with the first group). Sales would be expected to rise to $7.2 million annually. Incremental sales expectations would be payment, on average, after 65 days, and bad debt losses of 2 percent. No change would occur in the average collection period or bad debt losses on the original credit sales. First Picked Fruits has an opportunity cost of funds of 16 percent, and its variable costs are 94 percent of sales.

a. Which policy is preferred?

multiple choice 1

• Policy 1

• Policy 2

• Both

b. Based on the analysis stated, both the policies would be:

multiple choice 2

• Acceptable

• Unacceptable

c. This part of the question is not part of your Connect assignment.

3.

Mervyns Fine Fashion has an average collection period of 42 days. The accounts receivable balance is $86,302. What is the value of credit sales? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to the nearest whole dollar.)

Credit sales $

4.

Darlas Cosmetics had annual credit sales of $1,003,750 and an average collection period of 36 days in 20XX. What was the companys average accounts receivable balance? (Use 365 days a year. Do not round intermediate calculations.)

Average account receivable balance $

5.

Aurora Electrical Company of Yellowknife ships wind turbines throughout the country. Mr. Beam, the financial manager, has determined that through the establishment of local collection centres around the country, he can speed up the collection of payments by two days. Furthermore, the cash management department of the company's bank has indicated to him that he can defer payments on his accounts by one day without offending suppliers. The bank has a remote disbursement centre in New Brunswick.

a. If Aurora Electrical Company has $1.5 million per day in collections and $0.8 million per day in disbursements, how many dollars will the cash management system free up? (Enter the answer in dollars not in millions.)

Freed-up funds $

b. If Aurora Electrical Company can earn 4 percent per annum on freed-up funds, how much income can be generated? (Enter the answer in dollars not in millions.)

Interest on freed-up cash $

c. If the total cost of the system is $125,000, should it be implemented?

multiple choice

• Yes

• No

6.

Galehouse Gas Stations Inc. expects sales to increase from $1,550,000 to $1,750,000 next year. Galehouse believes that net assets (Assets Liabilities) will represent 50 percent of sales. His firm has an 8 percent return on sales and pays 45 percent of profits out as dividends.

a. What effect will this growth have on funds?

The cash balance will (Click to select) decrease by increase by .

b. If the dividend payout is only 25 percent, what effect will this growth have on funds?

The cash balance will (Click to select) decrease by increase by .

7.

Sharpe Knife Company expects sales next year to be $1,500,000 if the economy is strong, $800,000 if the economy is steady, and $500,000 if the economy is weak. Mr. Sharpe believes there is a 20 percent probability the economy will be strong, a 50 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?

Expected level of sales $

8.

Nighthawk Steel, a manufacturer of specialized tools, has $4,200,000 in assets.

Temporary current assets	$1,000,000
Permanent current assets	2,000,000
Capital assets	1,200,000
Total assets	$4,200,000

Short-term rates are 4 percent. Long-term rates are 6.5 percent. (Note that longterm rates imply a return to any equity). Earnings before interest and taxes are $860,000. The tax rate is 25 percent.

If long-term financing is perfectly matched (hedged) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly hedged plans, see Figure 68.

Earnings after taxes $

9.

Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.

a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over for remaining 2 years (reborrowed), each year at the same 8 percent rate? Compare this to the 10 percent, three-year loan.

	Amount
8 Percent	$
10 Percent	$
Interest saving	$

b. What if interest rates on the 8 percent loan go up to 13 percent in year two and 18 percent in year three? What is the total interest cost now compared to the 10 percent, three-year loan? (Input all answer as positive values.)

Variable Rate Alternative	Amount
1st year	$
2nd year	$
3rd year	$
Total Interest Expense	$
Fixed 10% Alternative
Total Interest Expense	$
Extra interest cost	$