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Fundamentals Of Financial Management 13th Revised Edition James Van Horne, John Wachowicz - Solutions
Us Republic Corporation Balance Sheet, December 31, 20x3Us Republic Corporation Statement Of Income And Retained Earnings, Year Ended December 31, 20x3a. Fill in the 20X3 column in the table that follows. US b. Evaluate the position of the company using information from the table. Cite specific
Contrast flow of funds (sources and uses) statements with cash budgets as planning tools.
Which of the following are sources of funds and which are uses of funds? a. Sale of land b. Dividend payments c. Decrease in accrued taxes d. Decrease in raw materials inventory e. Depreciation charges f. Sale of government bonds Now, go back and identify which items would appear under either the
Is the cash budget a better measure of liquidity than traditional measures, such as the current ratio and quick ratio?
What is the principal purpose of forecast statements? Being a projection of the future, how do they differ from the cash budget?
What are the two principal ways by which one can prepare forecast financial statements?
What is a sustainable growth rate for a company? Of what value is sustainable growth modeling?
Explain the differences between steady-state sustainable growth modeling and year-by-year modeling.
What is the purpose of a statement of cash flows? Discuss.
List the variables used in sustainable growth modeling. Which variables usually have the most effect on the growth rate in sales?
Discuss the benefits that can be derived by the firm from cash budgeting.
Why do most audited financial reports to the shareholders include a statement of cash flows in addition to the balance sheet and income statement?
Why might some managers actually prefer to work with a flow of funds statement rather than the cash flow statement?
Is depreciation a source of funds? Under what conditions might the "source" dry up?
Shmenge Brothers Accordion Company reports the following changes from the previous year end. Categorize these items as either a source of funds or a use of funds
Svoboda Corporation comparative balance sheets at December 31 (in millions)Svoboda Corporation statement of income and retained earnings, year ended December 31,20X2 (in millions)a. Prepare a flow of funds (sources and uses of funds) statement for 20X2 for the Svoboda Corporationb. Prepare a
Financial statements for the Begalla Corporation follow.Begalla Corporation comparative balance sheets at December 31 (in millions)Begalla Corporation income statement 20X2 (in millions)a. Prepare a sources and uses of funds statement for Begalla Corporation.b. Prepare a cash flow statement using
Prepare a cash budget for the Ace Manufacturing Company, indicating receipts and disbursements for May, June, and July. The firm wishes to maintain at all times a minimum cash balance of $20,000. Determine whether or not borrowing will be necessary during the period, and if it is, when and for how
Given the information that follows, prepare a cash budget for the Central City Department Store for the first six months of 20X2.a. All prices and costs remain constant.b. Sales are 75 percent for credit and 25 percent for cash.c. With respect to credit sales, 60 percent are collected in the month
Use the cash budget worked out in Problem 5 and the following additional information to prepare a forecast income statement for the first half of 20X2 for the Central City Department Store.a. Inventory at 12/31/X1 was $200,000.b. Depreciation is taken on a straight-line basis on $250,000 of assets
Given the following information and that contained in Problems 5 and 6, construct a forecast balance sheet as of June 30,20X2, for the Central City Department Store. (Assume that accounts payable stay the same as at December 31, 20X1.)Central City Department Store balance sheet at December 31,20X1
Liz Clairorn Industries has $40 million in shareholders' equity and sales of $150 million last year.a. Its target ratios are assets to sales, 0.40; net profit margin, 0.07; debt to equity, 0.50; and earnings retention, 0.60. If these ratios correspond to steady state, what is its sustainable growth
Herb I. Vore Hydroponics Corporation wishes to achieve a 35 percent increase in sales next year. Sales last year were $30 million, and the company has equity capital of $12 million. It intends to raise $0.5 million in new equity by the sale of common stock to officers. No dividend is planned.
What does working capital management encompass? What functional decisions are involved, and what underlying principle or trade-off influences the decision process?
How does shortening the maturity composition of outstanding debt increase the firm's risk? Why does increasing the liquidity of the firm's assets reduce the risk?
What are the costs of maintaining too large a level of working capital? Too small a level of working capital?
How is a margin of safety provided for in working capital management?
A firm is currently employing an "aggressive" working capital policy with regard to the level of current assets it maintains (relatively low levels of current assets for each possible level of output). The firm has decided to switch to a more "conservative" working capital policy. What effect will
Utilities hold 10 percent of total assets in current assets; retail trade industries hold 60 percent of total assets in current assets. Explain how industry characteristics account for this difference.
Distinguish between "temporary" and "permanent" working capital.
If the firm adopts a hedging (maturity matching) approach to financing, how would it finance its current assets?
Some firms finance their permanent working capital with short-term liabilities (commercial paper and short-term notes). Explain the impact of this decision on the profitability and risk of these firms.
Suppose that a firm finances its seasonal (temporary) current assets with long-term funds. What is the impact of this decision on the profitability and risk of this firm?
Risk associated with the amount of current assets is generally assumed to decrease with increased levels of current assets. Is this assumption always correct for all levels of current assets - in particular, for an excessively high level of current assets relative to the firm's needs? Explain.
At times, long-term interest rates are lower than short-term rates, yet the discussion in the chapter suggests that long-term financing is more expensive. If long-term rates are lower, should the firm finance itself entirely with long-term debt?
The Anderson Corporation (an all-equity-financed firm) has a sales level of $280,000 with a 10 percent profit margin before interest and taxes. To generate this sales volume, the firm maintains a fixed-asset investment of $100,000. Currently, the firm maintains $50,000 in current assets. a.
Mendez Metal Specialties, Inc., has a seasonal pattern to its business. It borrows under a line of credit from Central Bank at 1 percent over prime. Its total asset requirements now (at year end) and estimated requirements for the coming year are (in millions):Assume that these requirements are
Define the function of cash management.
Compare and contrast bankers' acceptances and Treasury bills as marketable security investments for the corporation.
Compare and contrast electronic commerce (EC), electronic data interchange (EDI), electronic funds transfer (EFT), and financial EDI (FEDI).
What is outsourcing7 Why might a company outsource some or all of its cash management processes? What is business processing outsourcing (BPO)7
How did "Check 21" in the US create the opportunity for banks to save both time and money?
Explain the concept of concentration banking.
Money market instruments are used as investment vehicles for otherwise idle cash. Discuss the most important criterion for asset selection in investing temporarily idle cash.
Discuss the impact of lockbox banking on corporate cash balances.
A firm desires to maintain a certain portion of its marketable securities portfolio to meet unforeseen cash needs. Would commercial paper or Treasury bills be better suited as short-term investments in this ready cash segment? Why?
What are compensating bank balances, and why are they not the same for all depositors?
What is net float7. How might a company "play the float" in its disbursements?
Assuming that the return on real assets of a company exceeds the return on marketable securities, why should a company hold any marketable securities?
Speedway Owl Company franchises "Gas and Go" stations in North Carolina and Virginia. All payments by franchisees for gasoline and oil products, which average $420,000 a day, are by check. At present, the overall time between the mailing of the check by the franchisee to Speedway Owl and the time
The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its Southern customers. The bank handles $3 million a day in return for a compensating balance of $2 million.a. The List Company has discovered that it could
The Franzini Food Company has a weekly payroll of $150,000 paid on Friday. On average, its employees cash their checks in the following manner:As treasurer of the company, how would you arrange your payroll account? Are there any problems?
Sitmore and Dolittle, Inc., has 41 retail clothing outlets scattered throughout the country. Each outlet sends an average of $5,000 daily to the head office in South Bend, Indiana, through checks drawn on local banks. On average, it takes six days before the company's South Bend bank collects the
Is it always good policy to reduce the firm's bad debts by "getting rid of the deadbeats"?
What are the principal implications to the financial manager of ordering costs, storage costs, and cost of capital as they relate to inventory?
Explain how efficient inventory management affects the liquidity and profitability of the firm.
How can the firm reduce its investment in inventories? What costs might the firm incur from a policy of very low inventory investment?
Explain how a large seasonal demand complicates inventory management and production scheduling.
Do inventories represent an investment in the same sense as fixed assets?
Should the required rate of return for investment in inventories of raw materials be the same as that for finished goods?
What are the probable effects on sales and profits of each of the following credit policies? a. A high percentage of bad-debt loss but normal receivable turnover and credit rejection rate. b. A high percentage of past-due accounts and a low credit rejection rate. c. A low percentage of past-due
What are the various sources of information you might use to analyze a credit applicant?
What is the purpose of establishing a line of credit for an account? What are the benefits of this arrangement?
The analysis of inventory policy is analogous to the analysis of credit policy. Propose a measure to analyze inventory policy that is analogous to the aging of accounts receivable.
To increase sales from their present annual $24 million, Kim Chi Company, a wholesaler, may try more liberal credit standards. Currently, the firm has an average collection period of 30 days. It believes that, with increasingly liberal credit standards, the following will result:The prices of its
Common Scents, Inc., makes various scents for use in the manufacture of food products. Although the company does maintain a safety stock, it has a policy of maintaining "lean" inventories, with the result that customers sometimes must be turned away. In an analysis of the situation, the company has
Upon reflection, Kim Chi Company has estimated that the following pattern of bad-debt losses will prevail if it initiates more liberal credit terms:Given the other assumptions in Problem 1, which credit policy should be pursued? Why?
Recalculate Problem 2, assuming the following pattern of bad-debt losses:Which policy now would be best? Why?
The Acme Aglet Corporation has a 12 percent opportunity cost of funds and currently sells on terms of "net/10, EOM." (This means that goods shipped before the end of the month must be paid for by the tenth of the following month.) The firm has sales of $10 million a year, which are 80 percent on
Porras Pottery Products, Inc., spends $220,000 per annum on its collection department. The company has $12 million in credit sales, its average collection period is 2.5 months, and the percentage of bad-debt losses is 4 percent. The company believes that, if it were to double its collection
The Pottsville Manufacturing Corporation is considering extending trade credit to the San Jose Company. Examination of the records of San Jose has produced the following financial statements:San Jose Company balance sheets (in millions)San lose Company income statements (in millions) The San Jose
A college bookstore is attempting to determine the optimal order quantity for a popular book on psychology. The store sells 5,000 copies of this book a year at a retail price of $12.50, and the cost to the store is 20 percent less, which represents the discount from the publisher. The store figures
The Hedge Corporation manufactures only one product: planks. The single raw material used in making planks is the dint. For each plank manufactured, 12 dints are required. Assume that the company manufactures 150,000 planks per year, that demand for planks is perfectly steady throughout the year,
A firm that sells 5,000 blivets per month is trying to determine how many blivets to keep in inventory. The financial manager has determined that it costs $200 to place an order. The cost of holding inventory is 4 cents per month per average blivet in inventory. A five-day lead time is required for
Compare and contrast a line of credit and a revolving credit agreement.
Would you rather have your loan on a "collect basis" or a "discount basis" if you were a borrower, all other things being the same? If you were a lender?
What determines whether a lending arrangement is unsecured or secured?
As a lender, how would you determine the percentage you are willing to advance against a particular type of collateral?
As a financial consultant to a company, how would you go about recommending whether to use an assignment of accounts receivable or a factoring arrangement?
Which of the methods of short-term financing considered in this chapter would be most likely to be used by the following? Explain your reasoning.a. A raw-materials processor, such as a mining or lumber companyb. A retail sales concern, such as an appliance retailer or stereo equipment dealerc. An
In choosing the composition of short-term financing, what factors should be considered?
Trade credit from suppliers is a very costly source of funds when discounts are lost. Explain why many firms rely on this source of funds to finance their temporary working capital.
Stretching payables provides "free" funds to customers for a short period. The supplier, however, can face serious financial problems if all of its customers stretch their accounts. Discuss the nature of the problems the supplier may face, and suggest different approaches to cope with stretching.
Suppose that a firm elected to tighten its trade credit policy from "2/10, net 90" to "2/10, net 30." What effect could the firm expect this change to have on its liquidity?
Why is the rate on commercial paper usually less than the prime rate charged by bankers and more than the Treasury bill rate?
Who is able to issue commercial paper and for what purpose?
How do bankers' acceptances differ from commercial paper as a means of financing?
The Dud Company purchases raw materials on terms of "2/10, net 30." A review of the company's records by the owner, Ms. Dud, revealed that payments are usually made 15 days after purchases are received. When asked why the firm did not take advantage of its discounts, the bookkeeper, Mr. Blunder,
Determine the annual percentage interest cost for each of the following terms of sale, assuming that the firm does not take the cash discount but pays on the final day of the net period (assume a 365-day year):a. 1/20, net 30 ($500 invoice)b. 2/30, net 60 ($1,000 invoice)c. 2/5, net 10 ($100
Does the dollar size of the invoice affect the percentage annual interest cost of not taking discounts? Illustrate with an example.
Recompute Problem 2, assuming a 10-day stretching of the payment date.a. 1/20, net 30 ($500 invoice)b. 2/30, net 60 ($1,000 invoice)c. 2/5, net 10 ($100 invoice)d. 3/10, net 30 ($250 invoice)
Hayleigh Mills Company has a $5 million revolving credit agreement with First State Bank of Arkansas. Being a favored customer, the rate is set at 1 percent over the bank's cost of funds, where the cost of funds is approximated as the rate on negotiable certificates of deposit (CDs). In addition,
Bork Corporation wishes to borrow $100,000 for one year. It has the following alternatives available to it. a. An 8 percent loan on a discount basis with 20 percent compensating balances required. b. A 9 percent loan on a discount basis with 10 percent compensating balances required. c. A 10.5
The Shelby Gaming Manufacturing Company has experienced a severe cash squeeze and needs $200,000 over the next 90 days. The company has already pledged its receivables in support of a loan. However, it does have $570,000 in unencumbered inventories. Determine the best financing alternative from the
The Bone Company has been factoring its accounts receivable for the past 5 years. The factor charges a fee of 2 percent and will lend up to 80 percent of the volume of receivables purchased for an additional 1.5 percent per month. The firm typically has sales of $500,000 per month, 70 percent of
Solid-Arity Corporation is a chain of appliance stores in Chicago. It needs to finance all of its inventories, which average the following during the four quarters of the year:Solid-Arity currently utilizes a loan from a finance company secured by a floating lien. The interest rate is the prime
When relevant project cash flows are examined, why is an increase in tax depreciation at first deducted and then later added back in determining incremental net cash flow for a period?
In capital budgeting, should the following be ignored, or rather added or subtracted from the new machine's purchase price when estimating initial cash outflow? When estimating the machine's depreciable basis?a. The market value of the old machine is $500, the old machine has a remaining useful
In determining the expected cash flows from a new investment project, why should past sunk costs be ignored in the estimates?
Discuss the adjustments in the capital budgeting process that should be made to compensate for expected inflation.
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