Assume that Hogan Surgical lnstniments Co. has $3,100,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 14 percent, but with a high-liquidity plan, the return will be 10 percent. If the rm goes with a short-term nancing plan, the nancing costs on the $3,100,000 will be 6 percent, and with a long-term nancing plan, the nancing costs on the $3,100,000 will be 8 percent. a. Compute the anticipated return after nancing costs with the most aggressive asset-nancing mix. 'Anticipated return i b. Compute the anticipated return after nancing costs with the most conservative asset-nancing mix. Anticipated return c. Compute the anticipated return after nancing costs with the two moderate approaches to the asset-nancing mix. Anticipated . Return , . lLow liquidity l l High liquidity l Assume that Atlas Sporting Goods Inc. has $1,050,000 in assets. if it goes with a low-liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity plan the return will be 12 percent. If the rm goes with a short-term nancing plan, the nancing costs on the $1,050,000 will be 9 percent, and with a long-term nancing plan, the nancing costs on the $1,050,000 will be 10 percent. a. Compute the anticipated return afternancing costs with the most aggressive asset-nancing mix. ' An ated return i b. Compute the anticipated return after nancing costs with the most conservative assetnancing mix. Anticipated return i 6. Compute the anticipated return after nancing costs with the two moderate approaches to the asset-nancing mix. 1 Anticipated Return l Low liquidity l ' High liquidity l d. If the rm used the most aggressive asset-nancing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be ifthe tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.) Earnings per share ' e-1. Now assume the most conservative assetnancing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.) Earnings per share ' e-2. Would the conservative mix have higher or lower earnings per share than the aggressive mix? A t ,, Lower '5 Higher Biochemical Corp. requires $590,000 in nancing overthe next three years. The rm can borrow the funds for three years at 9.00 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term nancing instead, she will pay 7.25 percent interest in the rst year, 11.90 percent interest in the second year, and 8.15 percent interest in the third year. Assume interest is paid in full at the end of each year. a. Determine the total interest cost under each plan. i riii'i 7 7" WErRoQ? lLong-term xed-rate ' 'Short-term variablerate ' b. Which plan is less costly? \Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $230,000. The company can borrow $230,000 for three years at 13 percent annual interest or for one year at 11 percent annual interest. Assume interest is paid in full at the end of each year. 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 (reborrowed) each year at the same 11 percent rate? Compare this to the 13 percent three-year loan. 13 percent loan i 11 percent loan 1 i i i interest savings Var bl Additional interest cost ate loan now ED 330 Snd Carmen's Beauty Salon has estimated monthly nancing requirements for the next six months as follows: January $ 9,200 April $ 9200 February 3,200 May 10,200 March 4,200 June 5.200 Short-term nancing will be utilized for the next six months. Projected annual interest rates are: January 6.0% April 13.0% February 1.0% May 12.0% March 10.0% June 12.0% a. Compute total dollar interest payments for the six months. (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.) Total dollar interest payments b-1. Compute the total dollar interest payments if long-term nancing at 12 percent had been utilized throughout the six months? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.) Total dollar interest payments b-Z. If long-term nancing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller than with the short-term nancing plan? C Larger O Smaller Bombs Away \\deo Games Corporation has forecasted the following monthly sales: January $ 102,000 July $ 47,000 February 95,000 August 47,000 March 21,000 September 57,000 April 27,000 October 87,000 May 22,000 November 107,000 June 37,000 December 125,000 Total annual sales = $780,000 Bombs Away \\deo Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month's production is equal to annual sales (in units) divided by 12. 0f each month's sales, 20 percent are for cash and 80 percent are on account. All accounts receivable are collected in the month after the sale is made. a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 27,000 units. Bombs Away Video Games Corporation Productlon and Inventory Schedule In Units I Beginning 1 Inventory January '1' 27,000i February V i March ' 1 April } May i _' Ending ' Inventory in Production Sales June July , August September ' October November , December b. Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000. Sales Cash receipts: ______ Prior month's credit sales ______ Total cash receipts Sales Cash receipts: Cash sales Prior month's credit sales Total cash receipts c. Prepare a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $47,000 per month. Production cost Other cash payments Total cash payments Production cost Other cash payments Total cash payments d. Prepare a monthly cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is $5,000, which is also the minimum desired. (Negative amounts should be indicated by a minus sign.) Beginning cash Net cash ow Cumulative cash balance Monthly loan or (repayment) Ending cash balance Cumulative loan balance Beginning cash Net cash ow Cumulative cash balance Monthly loan or (repayment) Ending cash balance Cumulative loan balance Global Services is considering a promotional campaign that will increase annual credit sales by $620,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: Accounts receivable 4 times Inventory 8 times Plantand equipment 2 times r. All $620,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 73 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 35 percent. a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. i Accounts receivable ' ' Inventory ' ' Plant and equipment ' Total Investment b. Compute the accounts receivable collection costs and production and selling costs and then add the two gures together. Production and selling costs l Collection cost ' l l Total collection, production, and selling costs c. Compute the costs of carrying inventory. d. Compute the depreciation expense on new plant and equipment. 5 e. Compute the total of all costs from parts b through d. f. Compute income after taxes. -1. What is the aftertax rate of return? (Input your answer as a percent rounded to 2 decimal places.) 9-2. If the rm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem? A No 0 Yes Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida. a. If Neon Light Company has $3.05 million per day in collections and $1.21 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions (9.9., $1,234,567\" 'rFreed-uprfun'ds ' b. If Neon Light Company can earn 7 percent per annum on freed-up funds, how much will the income be? (Enter your answer in dollars not in millions (e.g., $1,234,567).) Interest on freed-up cash i c. If the total cost of the new system is $480,000, should it be implemented? rx .7 ' No a, Yes Dome Metals has credit sales of $486,000 yearly with credit terms of net 90 days, which is also the average collection period. Assume the rm adopts new credit terms of 4/15, net 90 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the rm's bank loan which costs 12 percent. The new credit terms will increase sales by 20% because the 4% discount will make the rm's price competitive. a. If Dome earns 20 percent on sales before discounts, what will be the net change in income ifthe new credit terms are adopted? (Use a 360-day year.) Net change in income 1 b. Should the rm offer the discount? A Yes A '7,'N0 (1) (2) (3) (4) Month of Age of Percent of Sales Account Amounts Amount Due April 030 $ 120,540 March 3160 86,100 February 6190 103,320 January 91120 34,440 Total receivables $ 344,400 100% ' a. Calculate the percentage of amount due for each month. Percent of Month of Sales Amount Due Aprill 7777 W March % February V l % January l l% ' Total receivables 100 % ' b. If the rm had $1,476,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120day period. Average collection period ldays I c. If the rm likes to see its bills collected in 33 days, should it be satised with the average collection period? 0 Yes D No d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satised? 0 Yes ONO Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000 in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection expense. Production and marketing costs represent 70 percent of sales. The rm is in a 25 percent tax bracket and has a receivables turnover of two times. No other asset buildup will be required to service the new customers. The rm has a 10 percent desired return. a-1. Calculate the incremental income after taxes. Incremental income after taxes a-Z. Calculate the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places.) [R turn on incremental ' a-a. Should Fast Turnstiles Co. extend credit to these customers? a Yes 'W No b-1. Calculate the incremental income after taxes if 13 percent of the new sales prove to be uncollectible. Incremental income after taxes b-2. Calculate the return on incremental investment if 13 percent of the new sales prove to be uncollectible. (Input your answer as a percent rounded to 2 decimal places.) Return on incremental investment l% b6. Should credit be extended if 13 percent of the new sales prove uncollectible? 0 Yes G No 0-1. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 10 percent of the accounts are uncollectible. (Input your answer as a percent rounded to 2 decimal places.) Return on incremental investment '% 0-2. Should credit be extended ifthe receivables turnover drops to 1.6, and 10 percent of the accounts are uncollectible? O No 0 Yes 12. Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 71 percent of sales. The rm is in the 20 percent tax bracket. 3. Compute the incremental income after taxes. Incremental income after taxes b. What will Johnson's incremental return on sales be if these new credit customers are accepted? (Input your answer as a percent rounded to 2 decimal places.) Incremental return on sales % i c. If the accounts receivable turnover ratio is 3 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson's incremental return on new average investment be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Incremental return on new average 0 investment A 13. Your company plans to borrow $11 million for 12 months, and your banker gives you a stated rate of 22 percent interest. Calculate the effective rate of interest for the following types of loans. a. Simple 22 percent interest with a compensating balance of 22 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.) Effective rate of interest We b. Discounted interest (with no compensating balance). (Input your answer as percent rounded to 2 decimal places.) Effective rate of interest % c. An installment loan (12 payments). (Input your answer as a percent rounded to 2 decimal places.) Effective rate of interest ' % d. Discounted interest with a compensating balance of 11 percent. (Use a 360-day year. Input your answer as a percent rounded to 2 decimal places.) Effective rate of interest %