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Introduction to Finance Markets Investments and Financial Management 15th edition Melicher Ronald, Norton Edgar - Solutions
The Robinson Company has the current assets and current liabilities for the two years listed in the text. If sales in 2013 were $1.2 million and sales in 2014 were $1.3 million and cost of goods sold were 70 percent of sales, how long were Robinson’s operating cycles and cash conversion cycles in
The Robinson Company from Problem 2 had net sales of $1,200,000 in 2013 and $1,300,000 in 2014. a. Determine the receivables turnover in each year. b. Calculate the average collection period for each year. c. Based on the receivables turnover for 2013, estimate the investment in receivables if net
Suppose the Robinson Company had a cost of goods sold of $1,000,000 in 2013 and $1,200,000 in 2014. a. Calculate the inventory turnover for each year. Comment on your findings. b. What would have been the amount of inventories in 2014 if the 2013 turnover ratio had been maintained?
Given Robinson’s 2013 and 2014 financial information presented in problems 3 and 4, (a) Compute its operating and cash conversion cycle in each year. (b) What was Robinson’s net investment in working capital each year?
Robinson expects its 2015 sales and cost of goods sold to grow by 5 percent over their 2014 levels. a) What will be the effect on its levels of receivables, inventories, and payments if the components of its cash conversion cycle remain at their 2014 levels? What will be its net investment in
Robinson expects its 2015 sales and cost of goods sold to grow by 20 percent over their 2014 levels. a) What will be the effect on its levels of receivables, inventories, and payments if the components of its cash conversion cycle remain at their 2014 levels? What will be its net investment in
Financial statements for the Genatron Manufacturing Corporation for the years 2013 and 2014 are listed in the text. Calculate Genatron’s operating cycle and cash conversion cycle for 2013 and 2014. Why did they change between 2013 and 2014?
Genatron Manufacturing expects its sales to increase by 10 percent in 2015. Estimate the firm’s investment in accounts receivable, inventory, and accounts payable in 2015.
With concerns of increased competition, Genatron is planning in case its 2015 sales fall by 5 percent from their 2014 levels. If cost of goods sold and the current asset and liability accounts decrease proportionately, a) Calculate the 2015 cash conversion cycle b) Calculate the 2015 net
In problem 10, we assumed the current asset and liability accounts decrease proportionately with Genatron’s sales. This is probably unrealistic following a decline in sales. What will be the impact on the working capital accounts if its collection period lengthens by five days, its inventory
Suppose Global Manufacturing is planning to change its credit policies next year. It anticipates that 10 percent of each month’s sales will be for cash; two-thirds of each month’s receivables will be collected in the following month, and one-third will be collected two months following their
Global’s suppliers are upset that Global takes two months to pay their accounts payable; they demand that in the following year Global pay its bills within 30 days, or one month after the purchase.a. Using this new information, update Global’s cash outflow forecast shown in Table 15.5.b. Using
Of its monthly sales, The Kingsman Company historically has had 25-percent cash sales with the remainder paid within one month. Each month’s purchases are equal to 75 percent of the next month’s sales forecast; suppliers are paid one month after the purchase. Salary expenses are $50,000 a
Redo Problem number 14, using the monthly sales estimates listed in the text.
Using the information provided in problem 14, construct cash budgets from each of the following scenarios. Use the data from problem 14 as the “base case.” What insights do we obtain from a cash budget scenario analysis? a. Best case: sales are 10-percent higher than the base; purchases are
CD Later’s projected sales for the first four months of 201X are January......................... $60,000 February......................... $55,000 March......................... $65,000 April......................... $70,000 The firm expects to collect 10 percent of sales in cash, 60
Mattam Corporation’s year sales are $5 million and its average collection period is 32 days. Only 10 percent of sales are for cash and the remainders are credit sales. a. What is Mattam’s investment in accounts receivable? b. If Mattam extends its credit period, it estimates the average
Pa Bell, Inc., wants to increase its credit standards. They expect sales will fall by $50,000 and bad-debt expense will fall by 10 percent of this amount. The firm has a 15 percent profit margin on its sales. The tougher credit standards will lower the firm’s average receivables balance by
Robinson Company (recall their data from problems 2, 3, and 4) has a 2014 profit margin of 5 percent. They are examining the possibility of loosening their credit policy. Analysis shows that sales may rise 10 percent while bad debts on the change in sales will be 2 percent. The cost of financing
Genatron Manufacturing (from problem 8) is considering changing its credit standards. Analysis shows that sales may fall 5 percent from 2014 levels with no bad debts from the change in sales. The cost of financing the increase in current assets is 8 percent.a) Should Genatron change its credit
What is meant by “permanent” current assets? How do “temporary” current assets differ from permanent current assets?
Explain the strategies businesses can use to finance their assets with short-term and long-term funds.
What influences affect the nature of the demand for short-term versus long-term funds?
Explain how a conservative approach to financing a firm’s assets is a low risk/low expected return strategy whereas an aggressive approach to financing is a high risk/high expected return strategy.
Prepare a list of advantages and disadvantages of short-term bank borrowing relative to other short-term financing sources.
Explain what a bank line of credit is.
Explain how discounting and compensating balances affect the effective cost of financing.
Describe the revolving credit agreement and compare it with the bank line of credit.
What safeguards may a bank establish to protect itself when it lends on the basis of a customer’s receivables pledged as collateral for a loan?
What is meant by trade credit? Briefly describe some of the possible terms for trade credit.
What are the primary reasons for using trade credit for short-term financing?
How does the Small Business Administration provide financing to businesses?
What is the JOBS Act and what is its purpose?
What is commercial paper and how important is it as a source of financing?
Is commercial paper a reliable source of financing? Why or why not?
How is changing technology changing the methods of raising short-term funds?
A supplier is offering your firm a cash discount of 2 percent if purchases are paid for within 10 days; otherwise the bill is due at the end of 60 days. Would you recommend borrowing from a bank at an 18 percent annual interest rate in order to take advantage of the cash discount offer? Explain
Assume that you have been offered cash discounts on merchandise that can be purchased from either of two suppliers. Supplier A offers trade credit terms of 3/20, net/70, while Supplier B offers 4/15, net/80. What is the approximate effective cost of missing the cash discounts from each supplier? If
Compute the effective cost of not taking the cash discount under the following trade credit termsa. 2/10 net 40b. 2/10 net 50c. 3/10 net 50d. 2/20 net 40
What conclusions can you make about credit terms from reviewing your answers to Problem 4?
Your firm needs to raise funds for inventory expansion. a. What is the effective annual rate on a loan of $150,000 if it is discounted at a 12 percent stated annual rate and it matures in five months? b. How much must you borrow in order to obtain usable funds of $150,000? c. What is the effective
Bank A offers loans with a 10 percent stated annual rate and a 10 percent compensating balance. You wish to obtain $250,000 in a six-month loan. a. How much must you borrow in order to obtain $250,000 in usable funds? Assume you currently do not have any funds on deposit at the bank. What is the
Compute the effective annual rates of the following: a. $1 million maturing in 90 days with a stated annual rate of 6 percent. Fees are 0.02 percent of the principal. b. $15 million maturing in 60 days with a stated annual rate of 7.6 percent. Fees are 0.05 percent of the principal. c. $500,000
Construct a spreadsheet that computes the effective annual rates on the commercial paper offerings. Inputs to the spreadsheet should include the dollar amount of paper to be issued, the number of days the paper is outstanding, the stated annual rate, and fees. All paper is sold on a discount basis.
Wonder Dog Leash Company is examining their accounts receivable patterns. Wonder’s customers are offered terms of 1/10 net 30. Of their receivables, $150,000 are current, $75,000 are one-month overdue, $30,000 are two-months overdue, and $20,000 are over two-months overdue.a. What proportion of
Wonder Dog Leash Company is seeking to raise cash and is in negotiation with Big Bucks finance company to pledge their receivables. BB is willing to loan funds against 75% of current (that is, not overdue) receivables at a 15% annual percentage rate (see the aging of receivables in problem 10). To
Michael’s Computers is evaluating proposals from two different factors who will provide receivables financing. Big Fee Factoring will finance the receivables at an APR of 8 percent, discounted, and charges a fee of 4 percent. HighRate Factoring offers an APR of 14% (non-discounted) with fees of 2
Michael’s Computers’ local bank offers the firm a 12-month revolving credit agreement of $500,000. The APR of the revolver is 12 percent with a commitment fee of 0.5% on the unused portion. Over the course of a year, Michael’s chief financial officer believes they will have an average balance
Bank Two wants to attract Michael’s Computers, Inc. to become a customer. Their sales force contacts Michael’s and offers them line of credit financing. The credit line will be for $500,000 with a one-month “clean-up” period. The APR on borrowed funds is 11 percent. Banc Two will offer
Montcalm Enterprises is seeking bids on short-term loans with area banks. It expects its average outstanding borrowings to equal $320,000. Which of the following terms offers Montcalm the lowest effective rate? Town Bank: revolving credit agreement for $500,000 with a 15% APR, 0.5% commitment fee
Beckheart is seeking financing for its inventory. Safe-proof Warehouses offers space in their facility for Beckheart’s inventory. They offer loans with a 15-percent APR equal to 60% of the inventory. Monthly fees for the usage of the warehouse are $500 plus 0.5 percent of the inventory’s value.
CDRW is evaluating an inventory financing arrangement with DVD Banks. CDRW estimates an average monthly inventory balance of $800,000. DVD Bank is offering a 12 percent APR loan on 75 percent of the value of the inventory. DVD’s inventory storage and evaluation fees will be 1% a month on the
Which of the following offer the lowest effective rate for Wolf Howl jackets? Assume Wolf Howl will need to borrow $800,000 for 180 days. a. A 14% APR bank loan b. A 13% APR, discounted bank loan. c. 12.5% APR with fees of 1% for receivables financing. d. A $2 million revolving-credit agreement
Comfin Company has the following estimates on its level of current and total assets for the next two years (presented in text):a. Estimate the levels of permanent and temporary current assets for Comfin over these months. Find the average amount for fixed assets, permanent current assets, and
What is meant by capital budgeting? Briefly describe some characteristics of capital budgeting.
How do “mutually exclusive” and “independent” projects differ?
Where do businesses find attractive capital-budgeting projects?
Briefly describe the five stages in the capita- budgeting process.
How does the modified internal rate of return measure improve upon the IRR measure?
Describe the term “profitability index” and explain how it is used to compare projects.
Why do the NPV, IRR, and profitability index technique sometimes rank projects differently?
Why might managers want to use other techniques besides NPV to make capital budgeting decisions?
Label each of the following as a cannibalization effect, enhancement effect, or neither. Explain your answers. a. A computer manufacturer seeks to produce a high quality engineering work station, thinking that consumers will believe the firm's standard PC products will also be of higher quality. b.
“Our firm owns property around Chicago that would be an ideal location for the new warehouse. And since we already own the land there isn’t any cash flow needed to purchase it.” Do you agree or disagree with this statement? Explain.
Classify each of the following as a sunk cost, an opportunity cost, or neither. a. The firm has spent $1 million thus far to develop the next-generation robotic arm; it is now examining whether the project should continue. b. A piece of ground owned by the firm can be used as the site for a new
How is a project’s cash flow statement similar to that of a firm? How is it different?
Why is the change in net working capital included in operating cash flow estimates?
What is a way to keep managers accountable for their capital budgeting forecasts and estimates?
What is a risk-adjusted discount rate? How are risk-adjusted discount rates determined for individual projects?
Find the NPV and PI of a project that costs $1,500 and returns $800 in Year 1 and $850 in Year 2. Assume the project’s cost of capital is 8 percent.
Find the NPV and PI of an annuity that pays $500 per year for eight years and costs $2,500. Assume a discount rate of 6 percent.
Find the IRR of a project that returns $17,000 three years from now if it costs $12,000.
Find the IRR and MIRR of a project if it has estimated cash flows of $5,500 annually for seven years if its year zero investment is $25,000.
For the following projects, compute NPV, IRR, MIRR, profitability index, and payback. If these projects are mutually exclusive, which one(s) should be done? If they are independent, which one(s) should be undertaken?
The Sanders Electric Company is evaluating two projects for possible inclusion in the firm€™s capital budget. Project M will require a $37,000 investment while project O€™s investment will be $46,000. After-tax cash inflows are estimated as follows for the two projects:a.
A project is estimated to generate sales revenue of $10 million with expenses of $9 million. No change in net working capital is expected. Marginal profits will be taxed at a 35% rate. If the project's operating cash flow is $1 million, what is the project's depreciation expense? Its net income?
Compute operating cash flows for the following: a. A project that is expected to have sales of $10,000, expenses of $5,000, depreciation of $200, an investment of $50 in net working capital and a 20 percent tax rate. b. A project has the simplified project income statement below. In addition,
A machine can be purchased for $10,500 including transportation charges, but installation costs will require $1,500 more. The machine is expected to last four years and produce annual cash revenues of $6,000. Annual cash-operating expenses are expected to be $2,000, with depreciation of $3,000 per
Use the information in Problem 10 to do the following:a. Calculate the payback period for the machine.b. If the project’s cost of capital is 10 percent, would you recommend buying the machine?c. Estimate the internal rate of return for the machine.
The Brassy Fin Pet Shop is considering an expansion. Construction will cost $90,000 and will be depreciated to zero, using straight-line depreciation, over five years. Earnings before depreciation are expected to be $20,000 in each of the next five years. The firm’s tax rate is 34 percent.a. What
The following is a simplified project income statement for Ma & Pa Incorporated. The project is expected to last for eight years. Its up-front cost is $2,000. Its cost of capital is 12 percent.Sales........................................$925.00– cash expenses...................... 310.00–
Annual savings from Project X include a reduction in ten clerical employees with annual salaries of $15,000 each, $8,000 from reduced production delays, $12,000 from lost sales due to inventory stockouts, and $3,000 in reduced utility costs.Project X costs $250,000 and will be depreciated over a
Service. For $50,000, they give you training and exclusive territorial rights. Equipment can be purchased through the home office for an additional $50,000, all of which will be straight-line depreciated. The home office estimates your territory can generate $100,000 in sales volume in the first
The ice cream shop described in the text has been a smash success. Customers from the next college town are pleading with you to open one closer to them. Based on your operating experience and knowledge of local real estate, you believe that opening a new ice cream shop will require an investment
Sensitivity analysis involves changing one variable at a time in a capital budgeting situation and seeing how NPV changes. Perform sensitivity analysis on the each of the following variables from problem 17 to determine its effect on NPV. a) Sales can be 10-percent higher or lower than expected
Project R requires an investment of $45,000 and is expected to produce after-tax cash inflows of $15,000 per year for five years. The cost of capital is 10 percent. a. Determine the payback period, the net present value, and the profitability index for Project R. Is the project acceptable? b.
Assume the financial manager of the Sanders Electric Company in Problem 6 believes that Project M is comparable in risk to the firm’s other assets. In contrast, there is greater uncertainty concerning Project O’s after-tax cash inflows. Sanders Electric uses a 4 percentage point risk premium
The BioTek Corporation has a basic cost of capital of 15 percent and is considering investing in either or both of the following projects. Project HiTek will require an investment of $453,000, while Project LoTek€™s investment will be $276,000. The following after-tax cash flows
Briefly describe the trends that have occurred in the corporate use of debt.
How have the Fed’s policies since the 2007-2009 recession affected corporate financing decisions?
Following the Fed’s efforts to lower interest rates, what actions by investors increased their potential exposure to risk?
Briefly explain the concepts of business risk, operating leverage, and financial leverage in terms of an income statement.
How might the following influences affect a firm’s business risk (consider each separately)? a. Imports increase the level of competition b. Labor costs decline c. Health care costs (provided for all employees) increase d. The firm’s proportion of social security and unemployment insurance
How might the following influences affect a firm’s financial risk (consider each separately)? a. Interest rates on the firm’s short-term bank loans are reduced b. The firm refinances a mortgage on one of its buildings at a lower interest rate c. Tax rates decline d. The firm’s stock price
Briefly explain how the factors of flexibility and timing affect the mix between debt and equity capital.
The management of Albar Incorporate has decided to increase the firm’s use of debt form 30 percent to 45 percent of assets. How will this affect its internal growth rate in the future? Its sustainable growth rate?
A booming economy creates an unexpectedly high sales growth rate for a firm with a low internal growth rate. How can the firm respond to this unplanned sales increase?
How can a firm estimate its cost of debt financing?
Describe two methods for estimating the cost of retained earnings.
How does management’s strategy toward corporate growth and dividends affect its capital structure policy?
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