Problem 1 Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by two days. Based on the following information, should the lockbox system be adopted? Problem 2 How would your answer change if there were a fixed charge of $6,000 per year in addition to the variable charge? Problem 3 Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities Date Due: 07-Jul-22 400 $1,200 $.35 6.0% Sach, Inc., expects to sell 700 of its designer suits every week. The store is open seven days a week and expects to sell the same number of suits every day. The company has an EOQ of 500 suits and a safety stock of 100 suits. Once an order is placed, it takes three days for Sach to get the suits in. How many orders does the company place per year? Assume that it is Monday morning before the store opens, and a shipment of suits has just arrived. When will Sach place its next order? a. b. The Hawley Corporation is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion currently being undertaken. Fixed assets total $1 million, and the firm finances 60 percent of its total assets with debt and the rest with equity (common stock). Hawley's interest cost currently is 8 percent on both short-term and longer-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current asset level are available to the firm: (1) a tight policy requiring current assets of only 45 percent of projected sales, (2) a moderate policy of 50 percent of sales in current assets, and (3) a relaxed policy requiring current assets of 60 percent of sales. The firm expects to generate earnings before interest and taxes (EBIT) at a rate of 12 percent on total sales. What is the expected return on equity under each current asset level? (Assume a 40 percent marginal tax rate.) How would the overall riskiness of the firm vary under each policy? Problem 1 Bird's Eye Treehouses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by two days. Based on the following information, should the lockbox system be adopted? Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 400 $1,200 $.35 6.0% How would your answer change if there were a fixed charge of $6,000 per year in addition to the variable charge? Problem 2 Sach, Inc., expects to sell 700 of its designer suits every week. The store is open seven days a week and expects to sell the same number of suits every day. The company has an EOQ of 500 suits and a safety stock of 100 suits. Once an order is placed, it takes three days for Sach to get the suits in. How many orders does the company place per year? Assume that it is Monday morning before the store opens, and a shipment of suits has just arrived. When will Sach place its next order? Problem 3 The Hawley Corporation is attempting to determine the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion currently being undertaken. Fixed assets total $1 million, and the firm finances 60 percent of its total assets with debt and the rest with equity (common stock). Hawley's interest cost currently is 8 percent on both short-term and longer-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current asset level are available to the firm: (1) a tight policy requiring current assets of only 45 percent of projected sales, (2) a moderate policy of 50 percent of sales in current assets, and (3) a relaxed policy requiring current assets of 60 percent of sales. The firm expects to generate earnings before interest and taxes (EBIT) at a rate of 12 percent on total sales. What is the expected return on equity under each current asset level? (Assume a 40 percent marginal tax rate.) b. How would the overall riskiness of the firm vary under each policy? a