1.Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 35; and it currently pays on the 5thday and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

a. If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.

$_______

b. What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.

%______________

c. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.

%______________

d. If the company could get the funds from a bank at a rate of 10%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places.

%____________

e. Should Lancaster use bank debt or additional trade credit?

-Select Bank debt OR Additional trade credit

2.McEwan Industries sells on terms of 3/10, net 20. Total sales for the year are $1,940,000; 40% of the customers pay on the 10thday and take discounts, while the other 60% pay, on average, 80 days after their purchases. Assume 365 days in year for your calculations.

a. What is the days sales outstanding? Round your answer to two decimal places.

__________days

b. What is the average amount of receivables? Round your answer to the nearest cent. Do not round intermediate calculations.

$_____________

c. What is the percentage cost of trade credit to customers who take the discount? Round your answers to two decimal places.

%____________

d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 80 days? Round your answers to two decimal places. Do not round intermediate calculations.

Nominal cost:_______%

Effective cost: _______%

e. What would happen to McEwan's accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 20thday? Round your answers to two decimal places. Do not round intermediate calculations.

Days sales outstanding (DSO) =________days

Average receivables = $__________

3.Firms HL and LL are identical except for their financial leverage ratios and the interest rates they pay on debt. Each has $19 million in invested capital, has $5.7 million of EBIT, and is in the 40% federal-plus-state tax bracket. Firm HL, however, has a debt-to-capital ratio of 60% and pays 11% interest on its debt, whereas LL has a 40% debt-to-capital ratio and pays only 9% interest on its debt. Neither firm uses preferred stock in its capital structure.

a. Calculate the return on invested capital (ROIC) for each firm. Round your answers to two decimal places.

ROIC for firm LL is______%

ROIC for firm HL is______%

b. Calculate the rate of return on equity (ROE) for each firm. Round your answers to two decimal places.

ROE for firm LL is______%

ROE for firm HL is______%

c. Observing that HL has a higher ROE, LL's treasurer is thinking of raising the debt-to-capital ratio from 40% to 60% even though that would increase LL's interest rate on all debt to 15%. Calculate the new ROE for LL. Round your answer to two decimal places.

%______