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Contemporary Financial Management 10th Edition James R Mcguigan, R Charles Moyer, William J Kretlow - Solutions
Calculate the annual percentage rate of forgoing the cash discount under each of the following credit terms:a. 2/10, net 60b. 2/10, net 30
Determine the annual financing cost of a 1-year (365 day), $10,000 discounted bank loan at a stated annual interest rate of 9.5 percent. Assume that no compensating balance is required.
The Pulaski Company has a line of credit with a bank under which it can borrow funds at an 8 percent interest rate. The company plans to borrow $100,000 and is required by the bank to maintain a 15 percent compensating balance. Determine the annual financing cost of the loan under each of the
Determine the annual financing cost of a 6-month (182 day) $20,000 discounted bank loan at a stated annual interest rate of 10 percent. Assume that no compensating balance is required.
Pyramid Products Company has a revolving credit agreement with its bank. The company can borrow up to $1 million under the agreement at an annual interest rate of 9 percent. Pyramid is required to maintain a 10 percent compensating balance on any funds borrowed under the agreement and to pay a 0.5
Wellsley Manufacturing Company has been approached by a commercial paper dealer offering to sell an issue of commercial paper for the firm. The dealer indicates that Wellsley could sell a $5 million issue maturing in 182 days at an interest rate of 8.5 percent per annum (deducted in advance). The
The Brandt Company has been approached by two different commercial paper dealers offering to sell an issue of commercial paper for the company. Dealer A offered to market an $8 million issue maturing in 90 days at an interest cost of 8.5 percent per annum (deducted in advance). The fee to Dealer A
Ranger Enterprises is considering pledging its receivables to finance a needed increase in working capital. Its commercial bank will lend 75 percent of the pledged receivables at 1.5 percentage points above the prime rate, which is currently 12 percent. In addition, the bank charges a service fee
Designer Textiles, Inc., is considering factoring its receivables. The company’s average collection period is 60 days, and its average level of receivables is $2.5 million. Designer’s bad-debt losses average $15,000 a month. If the company factors its receivables, it will save $4,000 a month by
The Eaton Company needs to raise $250,000 to expand its working capital and has been unsuccessful in attempting to obtain an unsecured line of credit with its bank. The firm is considering stretching its accounts payable. Eaton’s suppliers extend credit on terms of “2/10, net 30.” Payments
Which of the following credit terms would you prefer as a customer? a. 2/10, net 30b. 1/10, net 40c. 2/10, net 40d. 1/10, net 25e. Indifferent among all options Explain your choice.
The Odessa Supply Company is considering obtaining a loan from a sales finance company secured by inventories under a field warehousing arrangement. Odessa would be permitted to borrow up to $300,000 under such an arrangement at an annual interest rate of 10 percent. The additional cost of
Harpo Music Mart needs to raise $300,000 to increase its working capital. The bank, mindful of Harpo’s strained financial condition, has refused to loan the firm the needed funds. Harpo is considering stretching its accounts payable in order to raise the funds. Current credit terms are “3/10,
The Kittanning Company has a $2 million line of credit with First Interstate Bank under which it can borrow funds at 1.5 percentage points above the prime rate (currently 9 percent). The company plans to borrow $1.5 million and is required by First Interstate to maintain a 10 percent compensating
The Vandergrift Company has a revolving credit agreement with Commerce Bank under which the company can borrow up to $5 million at an annual interest rate of 1 percentage point above the prime rate (currently 9 percent). The company is required to maintain a 10 percent compensating balance on any
Titusville Petroleum Company is considering pledging its receivables to finance an increase in working capital. Citizens National Bank will lend the company 80 percent of the pledged receivables at 2 percentage points above the prime rate (currently 10 percent). The bank charges a service fee equal
DuBois Apparel Company is considering factoring its receivables. The company’s average level of receivables is $1.5 million, and its average collection period is 45 days. DuBois’s bad-debt losses average $8,000 per month, which it would not incur if it factored its receivables. (Assume 30 days
The Clearfield Company would be permitted to borrow up to $750,000 secured by inventories under a field warehouse arrangement with a sales finance company. The annual interest rate would be 12 percent. The additional cost of establishing a field warehouse would be $35,000 per year. Determine the
1. Anderson’s bank requires a compensating balance of $3 million. How much additional funds can be freed up for investment in fixed assets if the firm reduces its cash balance to the minimum required by the bank?2. How much additional financing can be obtained from receivables if Anderson
Define the following terms:a. Demand depositsb. Compensating balancec. Disbursement floatd. Deposit floate. Lockboxf. Wire transferg. Depository transfer checkh. Zero-balance systemi. Draftj. Automated clearinghouse
What are the primary reasons a firm holds a liquid asset balance?
Describe the cost trade-offs associated with maintaining the following:a. Excessive liquid asset balancesb. Inadequate liquid asset balances
Define float and describe the difference between disbursement float and deposit float.
Describe the primary services a bank provides to a firm. How is the bank compensated for these services?
Describe the methods available to a firm for expediting the collection of cash.
Describe the techniques available to a firm for slowing disbursements.
Explain the trade-offs involved in determining the number of collection centers that a firm should use.
What factors should the firm consider in deciding whether to establish a lockbox collection system?
What are the primary criteria in selecting marketable securities for inclusion in a firm’s portfolio?
What types of marketable securities are most suitable for inclusion in a firm’s portfolio? What characteristics of these securities make them desirable investments for temporarily idle cash balances?
What is multilateral netting? Give an example of how this would work for a multinational firm.
What measures can the board of directors of a corporation take to discourage unethical (and illegal) behavior, such as the mail and wire fraud by E. F. Hutton managers described in the chapter?
Dexter Instrument Company’s sales average $3 million per day.a. If Dexter could reduce the time between customers’ mailing their payments and the funds becoming collected balances by 2.5 days, what would be the increase in the firm’s average cash balance?b. Assuming that these additional
Exman Company performed a study of its billing and collection procedures and found that an average of 8 days elapses between the time when a customer’s payment is received and when the funds become usable by the firm. The firm’s annual sales are $540 million.a. Assuming that Exman could reduce
Great Lakes Oil Company currently processes all its credit card payments at its domestic headquarters in Chicago. The firm is considering establishing a lockbox arrangement with a Los Angeles bank to process its payments from 10 western states (California, Nevada, Arizona, Utah, Oregon, Washington,
Japanese Motors, a major importer of foreign automobiles, has a subsidiary (Japanese Motor Credit Company, or JMCC) that finances dealer inventories, as well as retail installment purchases of the company’s cars. With respect to the financing of retail purchases, JMCC currently employs a
J-Mart, a nationwide department store chain, processes all its credit sales payments at its suburban Detroit headquarters. The firm is considering the implementation of a lockbox collection system with an Atlanta bank to process monthly payments from its southeastern region. Annual credit sales
Peterson Electronics uses a decentralized collection system whereby customers mail their payments to one of six regional collection centers. The checks are deposited each working day in the collection center’s local bank, and a depository transfer check for the amount of the deposit is mailed to
Wisconsin Paper Company is considering establishing a zero-balance system for its payroll account. The firm pays its employees every 2 weeks on Friday (that is, 26 pay periods per year). Currently, the firm deposits the necessary funds in the payroll account on Friday to cover the total amount of
The High-Rise Construction Company, located in Houston, receives large remittances (that is, progress payments) from customers with whom it has contracts. These checks are frequently drawn on New York City banks. If the checks are deposited in High-Rise’s Houston bank, the funds will not become
Jackson’s Thriftway currently processes all of its credit sales at its Seguin, Texas, headquarters. The firm is considering establishing a lockbox arrangement with a Chicago bank to process payments from customers in 12 midwestern states. Average mailing time for customers from this region is
Two banks, First Fidelity Bank and First Union Bank, have offered to process Zack’s retail charge card payments. First Fidelity will process the payments for a fee of $0.15 per payment with no compensating balance required. First Union will process the payments “free of charge,” provided that
World Telephone & Telegraph (WTT) is considering the establishment of a zero-balance system for its dividend payment account. The firm pays common stockholders quarterly dividends. Currently, WTT deposits the necessary funds to cover the dividend payments on the day the checks are mailed to
Tokyo Electric Company (TEC) sells most of its products in the United States through 50 large distributors and retail chains (e.g., Sears, Kmart, etc.). Currently, TEC’s customers mail their payments, which are due monthly, to the company. The company is considering having its customers make
What are the marginal returns and costs associated with a more liberal extension of credit to a firm’s customers?
What are the major credit policy variables a firm can use to control its level of receivables investment?
Define the following terms:a. Average collection periodb. Bad-debt loss ratioc. Aging of accounts
Discuss at least two reasons why a firm might want to offer seasonal datings to its customers.
Describe the marginal costs and benefits associated with each of the following changes in a firm’s credit and collection policies:a. Increasing the credit period from 7 to 30 daysb. Increasing the cash discount from 1 to 2 percentc. Offering a seasonal dating credit pland. Increasing collection
Describe the three steps involved in evaluating credit applicants.
What are the primary sources of information about the creditworthiness of credit applicants?
Describe the five Cs of credit used in evaluating the creditworthiness of a credit applicant.
How does a firm’s required rate of return on investment enter into the analysis of changes in its credit and collection policies?
A firm is currently selling on credit terms of “net 30,” and its accounts receivable average 30 days past due (i.e., the firm’s average collection period is 60 days).What credit policy variables might the firm consider changing to reduce its average collection period?
“The objective of the firm’s credit and collection policies should be to minimize its bad-debt losses.” Do you agree or disagree with this statement? Explain.
Discuss how each of the following factors would tend to affect a firm’s credit extension policies:a. A shortage of working capitalb. An increase in output to the point where the firm is operating at full production capacityc. An increase in the firm’s profit margin (i.e., its profit
Describe the benefits of holding the following:a. Raw materials inventoriesb. Work-in-process inventoriesc. Finished goods inventories
Describe the components of carrying costs.
How do ordering costs for items purchased externally differ from ordering costs for items manufactured internally within the firm?
Describe the nature of stockout costs associated with a stockout in the following:a. Raw materials inventoriesb. Work-in-process inventoriesc. Finished goods inventories
What is ABC inventory classification? How can this method be useful to a business?
Describe the assumptions underlying the basic EOQ model.
In general terms, describe how to deal with each of the following conditions when determining the optimal inventory level:a. Constant (nonzero) replenishment lead time known with certaintyb. Demand and replenishment lead time subject to uncertainty
How does the firm’s required rate of return on investment enter into inventory decisions?
What are just-in-time inventory models?
Define the following terms:a. Stockoutb. Deterministic inventory control modelsc. Probabilistic inventory control modelsd. Safety stocke. Lead time
Miranda Tool Company sells to retail hardware stores on credit terms of “net 30.” Annual credit sales are $18 million and are spread evenly throughout the year. The company’s variable cost ratio is 0.70, and its accounts receivable average $1.9 million. Using this information, determine the
Drake Paper Company sells on terms of “net 30.” The firm’s variable cost ratio is 0.80.a. If annual credit sales are $20 million and its accounts receivable average 15 days overdue, what is Drake’s investment in receivables?b. Suppose that, as the result of a recession, annual credit sales
Looking back at Tables 18.1 and 18.2, evaluate the impact on Bassett’s pretax profits of extending full credit to the customers in Credit Risk Group 5. Assume that Bassett’s pretax required rate of return on inventory investments is 20 percent and that an additional inventory investment of
Once again, consider the Bassett Furniture Industries example (Tables 18.1 and 18.2). Assume that rising labor and interest costs have increased Bassett’s variable cost ratio from 0.75 to 0.80 and its required pretax rate of return on receivables and inventory investments from 20 to 25 percent.
Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on terms of “net 120.” Its average collection period is 150 days. The company is considering the introduction of a 4 percent cash discount if customers pay within 30 days. Such a change in credit terms is
In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30.” Currently, the company’s collection period averages 43 days. Under the new credit
The North Carolina Furniture Company (NCFC) manufactures upholstered furniture, which it sells to various small retailers in the Northeast and Midwest on credit terms of “2/10, net 60.” The company currently does not grant credit to retailers with a 3 (fair) or 4 (limited) Dun & Bradstreet
Michigan Pharmaceuticals, Inc., a wholesale distributor of ethical drugs to local pharmacies, has been experiencing a relatively long average collection period because many of its customers face liquidity problems and delay their payments well beyond the due date. In addition, its bad-debt loss
Swenson Electric Company sells on terms of "net 30." Given the following information on its receivables, construct an aging of accounts schedule as of September 1, showing the percentage of accounts that are current, 1 to 30 days past due, 31 to 60 days past due, 61 to 90 days past due, and over 90
Creole Industries, Inc., estimates that if it spent an additional $20,000 to hire another collection agent in its credit department, it could lower its bad-debt loss ratio to 3.5 percent from a current rate of 4 percent and also reduce its average collection period from 50 to 45 days. (Assume that
Jenkins Supply Corporation sells $120 million of its products to wholesalers on terms of “net 50.” Currently, the firm’s average collection period is 65 days. In order to speed up the collection of receivables, Jenkins is considering offering a 1 percent cash discount if customers pay their
The Bimbo Corporation has been experiencing a decline in sales relative to its major competitors. Because Bimbo is confident about the quality of its products, it suspects that this sales loss may reflect its relatively stringent credit standards and terms. The firm currently has credit sales of
Allied Apparel Company received a large order from Websters Department Stores, which operates a chain of approximately 300 popular-priced department stores located primarily in the New England–Middle Atlantic states. Allied is considering extending trade credit to Websters. As part of its
Saccomanno Industries, Inc., is considering whether to discontinue offering credit to customers who are more than 10 days overdue on repaying the credit extended to them. Current annual credit sales are $10 million on credit terms of “net 30.” Such a change in policy is expected to reduce sales
The Blawnox Company is concerned about its bad-debt losses and the length of time required to collect receivables. Current sales are $43.8 million per year. Bad-debt losses are currently 3.5 percent of sales, and the average collection period is 68 days (credit terms are “net 30”). One plan
Allstar Shoe Company produces a wide variety of athletic-type shoes for tennis, basketball, and running. Although sales are somewhat seasonal, production is uniform throughout the year. Allstar’s production and sales average 1.92 million pairs of shoes per year. The company purchases shoelaces
Quick-Copy Duplicating Company uses 110,000 reams of standard-size paper a year at its various duplicating centers. Its current paper supplier charges $2.00 per ream. Annual inventory carrying costs are 15 percent of inventory value. The costs of placing and receiving an order of paper are $41.25.
East Publishing Company employs a high-speed printing press in its operations. A typical production run of 5,000 to 50,000 copies of a textbook can be produced in less than one day. The manager of the business textbook division is attempting to determine the optimal number of copies of the seventh
Arizona Instruments uses integrated circuits (ICs) in its business calculators. Its annual demand for ICs is 120,000 units. The ICs cost Arizona Instruments $10 each. The company has determined that the EOQ is 20,000 units. It takes 18 days between when an order is placed and when the delivery is
General Cereal Company purchases various grains (e.g., wheat and corn) that it processes into ready-to-eat cereals. Its annual demand for wheat is 250,000 bushels. Assume that demand is uniform throughout the year. The average price of wheat is $3.0625 per bushel (delivered). Annual inventory
Books, etc., a nationwide chain of bookstores, anticipates that annual demand for the paperback version of a best-selling novel will be 150,000 copies. The books cost the firm $2 each. Books, etc. has determined that the optimal order quantity (EOQ) is 30,000 copies. It takes 20 days between when
What are the primary differences between operating leases and financial leases?
How does a leveraged lease differ from a nonleveraged financial lease? What type of firm or organization is most likely to take advantage of the leveraged lease financing option? What type of individual or financial institution is most likely to act as the lessor in a leveraged lease?
From a tax perspective, what primary requirements in a lease transaction must be met in order for the IRS to consider the transaction a genuine lease? Why is a favorable IRS ruling regarding the tax status of a lease important to both the lessor and the lessee?
One advantage that has often been claimed of lease financing is that it creates “off-balance sheet” financing. Evaluate this benefit in light of FASB Standard No. 13.
How can leasing allow a firm to effectively “depreciate” land?
What effect does leasing have on the stability of a firm’s reported earnings?
It has been argued that leasing is almost always more expensive than borrowing and owning. Do you think this is true? Why or why not? Under what circumstances is leasing likely to be more desirable than direct ownership?
Why do you think it is easier for firms with weak credit positions to obtain lease financing than bank loan financing?
Under what circumstances might a firm prefer intermediate-term borrowing to either long- or short-term borrowing?
Discuss the advantages and disadvantages of the following types of term loans:a. Those that require equal periodic paymentsb. Those that require equal periodic reductions in outstanding principalc. Balloon loansd. Bullet loans
What are the major factors that influence the effective cost of a term loan?
Define the following and give an example of each:a. Affirmative covenantsb. Negative covenantsc. Restrictive covenants
What institutions are the primary suppliers of business term loans?
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