Questions and Answers of Foundations Financial Management

Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It keeps funds for transaction purposes in many foreign currencies. Assume that in 2015 it held 100,000 reals in
Manning Alternatives presently sells to its customers on terms of 2/10, net 30. Its average collection period is 14 days, with 85 percent currently taking the discount.All sales are credit sales.
Happy Trail Adventure Products is reevaluating its credit policy. Current terms are 2/10, net 30, resulting in annual sales of 400,000 units. Cash sales that qualify for the discount account for 10
Discuss the major types of collateralized short-term loans.
What is the major advantage of a bankers' acceptance?
Lipto Biomedic has credit sales of $740,000 yearly with credit terms of net 60 days, with an average collection period of 75 days. Lip to does not offer a discount for early payment.a. What is the
Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its
In the previous problem, if inventory had only been four times,a. What would be the new value for inventory investment?b. What would be the return on investment? You need to recompute the total
Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $600,000. The company will require investments in accounts receivable, inventory, and plant and
Reconsider Comiskey Fence. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectible). Should credit be extended?Data from
Henderson Office Supplies is considering a more liberal credit policy to increase sales, but it expects that 8 percent of the new accounts will be uncollectible.Collection costs are 5 percent of new
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new
Wontaby Ltd. is extending its credit terms from 30 to 45 days. Sales are expected to increase from $4.7 million to $5.8 million as a result. Wontaby finances short-term assets at the bank at a cost
Bugle Boy Company has an opportunity cost of funds of 10 percent and a credit policy based on net 45 days. If all of its customers adhere to the stated terms and annual sales increase from $3.96
Mervyn's Fine Fashion has an average collection period of 42 days. The accounts receivable balance is $86,302. What is the value of credit sales?
In the previous problem, if accounts receivable change in 2016 to $138,600, and credit sales increase to $1,204,500, should we assume that the firm has a more or less lenient credit policy?Previous
Darla's Cosmetics had annual credit sales of $1,003,750 and an average collection period of 36 days in 2015. What was the company's average accounts receivable balance?
Sanders' Prime Time Lighting Co. has credit sales of $1,875,000 and accounts receivable of $195,205. Compute the value for the average collection period.
A 91-day Treasury bill with a face value of $1 million is sold to yield 5.27 percent.a. At what price did the T -bill sell if the yield was quoted by the market?b. At what price did the T -bill sell
A bankers' acceptance is discounted by Canmex Inc. at 98.71 of par. It matures in 60 days.a. What is the cost to the company on a nominal basis?b. What is the effective annual cost to the company?
Differentiate between the money market and the Eurobond market.
Lett's commercial paper is presently selling at a discount. It sells for 97.29 of par and matures in 120 days.a. Calculate its yield as quoted in the market.b. Calculate its effective annual yield.
Why are U.S. money market rates generally lower than Canadian money market rates on instruments of similar risk?
Ron's cheque book shows a balance of $400. A recent statement from the bank (received last week) shows that all cheques written as of the date of the statement have been paid, except numbers 325 and
Your banker has analyzed your company account and has suggested that her bank has a cash management package for you. She suggests that with a concentration banking system, your float can be reduced
Leeft Bank offers to reduce the collection time for your company's daily cash receipts by two days with its cash management system. This service will cost you $15,000 per year. Currently, short-term
The current cash management system of Low Ash Cat Foods requires five days to collect its daily receipts of $225,000. Now Bank offers to reduce the collection time by four days for an annual fee of
How can a firm operate with a negative cash balance on its corporate books?
Aurora Electrical Company of Yellowknife ships wind turbines throughout the country. Mr. Beam, the financial manager, has determined that through the establishment of local collection centres around
Why are cash flows of more interest than income to the treasury manager?
Sheila's Society Clothing Manufacturer has collection centres around the country to speed up cash collections. The company also makes its disbursements from remote disbursement centres, so cheques
Power Play Inc. has seen profits drop acutely because of the economic downturn. To enhance profitability and to preserve cash, Power Play is considering shortening its credit period and eliminating
OB1 Sabres Ltd. has determined that product sales are not what they could be because they have unused capacity. As a result, the company is considering adjusting its marketing strategy. At present,
First Picked Fruits Inc. is considering two alternatives to stimulate sales. Currently, the policy is net 30 and the average collection period is 40 days, with bad debt losses of 1.25 percent of
Nowlin Pipe & Steel has expected sales of 72,000 pipes this year, an ordering cost of $6.00 per order, and carrying costs of $2.40 per pipe.a. What is the economic ordering quantity?b. How many
Friendly Home Services expects sales of baskets to be $125,000 this year, an ordering cost of $75.00 per order, and carrying costs of $3.00 per basket. The price of a basket is $25.a. What is the
Fisk Corporation is trying to improve its inventory control system and has installed an online system at its retail stores. Fisk anticipates sales of 75,000 units per year, an ordering cost of $8 per
Higgins Athletic Wear has expected sales of 22,500 units a year, carrying costs of $1.50 per unit, and an ordering cost of $3.00 per order.a. What is the economic order quantity?b. What is average
North Pole Snowmobile is considering a switch to level production. Under level production, cost efficiencies would occur and aftertax costs would decline by $30,000, but inventory would increase by
Minty Air fresheners Ltd. maintains an inventory of bottles with chemical disinfectants to meet its annual demand for 81,600 bottles to service restrooms. Each package costs $4.75, and the order cost
Downey Disks is experiencing some inventory control problems. The manager currently orders four times each year with the annual purchase of the inventory costing $200,000. Each inventory item costs
A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should the financial manager recognize as the true cost of borrowing?
Baktoo Basics Ltd. is considering introducing an inventory control system that will increase inventory turnover from 10 to 15 times per year. Its annual cost of goods sold is expected to be $6
Logan Distributing Company of Lethbridge sells fans and heaters throughout the west. Joe Logan, the president of the company, is thinking about changing the credit policies offered by the firm to
Assume that you are risk adverse and have the following three choices. Which project would you select? Compute the coefficient of variation for each choice. Standard deviation Expected value $1,800
Gifford Western Wear makes blue jeans and cowboy shirts. It has seven manufacturing outlets in British Columbia and Alberta. It is seeking to diversify its business and lower its risk. It is
Transoceanic Airlines is examining a resort motel chain to add to its operations. Before the acquisition, the normal expected outcomes for the firm were as follows:After the acquisition the expected
What has been the composition of long-term financing by corporations over the past decade?
Jimmy has the following two investments in his portfolio:a. Which investment is riskier by itself and in a portfolio sense?b. What is the expected return of the portfolio?c. With a correlation
Indigo Ltd. is faced with three investment proposals with the following information:The cash flow is after tax and includes the tax savings on CCA. Indigo has a cost of capital of 10 percent, the
Ace Trucking Company is considering buying 50 new diesel trucks that are 15 percent more fuel-efficient than the ones the firm is now using. Mr. King, the president, has found that the company uses
Mr. Boone is looking at a number of different types of investments for his portfolio. He identifies eight possible investments.a. Graph the data in a manner similar to Figure 13-11.b. Draw a curved
Why do we have the four pillars of finance concept in Canada?
Discuss tests you would develop to prove market inefficiencies.
Discuss the characteristics that would make a market efficient.
What is meant by abnormal profits?
Why does the Toronto Stock Exchange have listing requirements? What are the major requirements? How do they compare with the listing requirements of the other exchanges?
What is the difference between organized exchanges and over the-counter markets?
Discuss the importance of security markets for both the corporation and the shareholder or bondholder.
Comment on the use of external versus internal sources of funds by corporations.
What implications are there for the capital markets as the federal government reduces/increases its accumulated debt?
Discuss the average maturity of the federal government's marketable interest bearing public debt and the implications for the money and capital markets if the present trend continues.
How does the economy influence the amount of funds raised by the federal government in the long-term markets?
Name the major competitors for funds in the capital markets.
Sam McGee, the financial analyst in the service of Labarge Ltd., is investigating the Midnight Sun project that is quite unlike any of its existing projects. It would require an initial investment of
Fine Winehouse is analyzing an investment very different from its current investments. The initial investment would be $500,000 with current liabilities increasing by $30,000. The anticipated
What are the implications of the changing regulations governing the Canadian securities industry?
Discuss the changes currently occurring in Canada's financial and regulatory environment.
Music Box Records uses the MIRR. The firm has a cost of capital of 10 percent. The project being analyzed has a $39,000 initial investment and is expected to produce the following case flows:Year
The Caffeine Coffee Company uses the MIRR. The firm has a cost of capital of 12 percent. The project being analyzed has a $27,000 initial investment and is expected to produce the following case
Keller Construction is considering two new investments. Project E calls for the purchase of earth-moving equipment. Project H represents the investment in a hydraulic lift. Keller wishes to use a NPV
Luft Watch Company is considering an investment of $15,000, which produces the following inflows:Year ............Cash flow1 ....................$8,0002 ......................7,0003
XYZ Corporation has decided to sell one of its windmills for $5 million. This building is part of the Class 3 (5 percent) CCA pool, and XYZ had it built five years ago at a cost of $4.5 million.
A $95,000 investment is to be amortized for tax purposes using the maximum CCA available.a. If the investment represents a fleet of automobiles for a telephone utility, what will be the allowable CCA
Coastal Shipping Corporation has decided to sell one of its vessels for $1 million.This vessel is part of the Class 7 (15 percent) CCA pool, and Coastal had it built three years ago at a cost of $1.2
Nexus Corp. has made a $1 ,500,000 investment that is to be amortized for tax purposes using the maximum CCA available.a. If the investment represents an aircraft, what will be the allowable CCA
The Thorpe Corporation will purchase a $50,000 piece of production machinery with an estimated useful life of five years. The new machine is expected to allow an increase in sales of $80,000 per
Acme Auto Parts Ltd. has gained approval for an eligible scientific research and experimental development on Cape Breton Island and is intending to invest $1.7 million.a. Assuming the tax rules
Follett Enterprises has purchased three greenhouses over the past five years, but today it sold them all for $500,000. Five years ago, Follett purchased the first greenhouse for $300,000, two years
The Elite Car Rental Corporation is contemplating expanding its short-term rental fleet by 30 automobiles at a cost of $900,000. It expects to keep the autos for only two years and to sell them at
Albert I. Stein Ltd. is considering the investment of $75,000 in a new machine that will allow it to do research on developing a new microchip for use in video games. The machine will be assigned to
Pierce Labs, located in Gaspe Bay, purchased a radio communication system three years ago for $310,000. It has a potential buyer for the system who is willing to pay $85,000. A new system will cost
On graduating from college, Steven MacLean joined the financial analysis section of a large Canadian industrial concern, Ontario Corporation. Soon after, MacLean was assigned to help in the financial
Signs For Fields Machinery Ltd. is considering the replacement of some technologically obsolete machinery with the purchase of a new machine for $72,000. Although the older machine has no market
H. Improvements Ltd. is evaluating the replacement of an older machine. There are two possible replacements under consideration-the OuOu and the Major OuOu. The existing machine was purchased a few
The Jagged Pill Ltd. has placed a $60,000 nonrefundable deposit on a new venture. The deposit can be expensed immediately. This has entitled Jagged Pill to additional information (of a trade-secret
Galaxydoughs Tea Ltd. has been considering a special investment for some time. This project will require an immediate capital expenditure of $1 million for required equipment. Galaxydoughs Tea will
Rinkydink Roller Rinks Ltd. is considering acquiring a vacant lot adjacent to one of its centres. The lot would be used for parking during special events at the nearby Sports and Convention Centre
Clueless Company, a successful business enterprise, is considering a new capital project with a degree of risk 50 percent higher than its normal business ventures. The new project would involve an
Quixotic Enterprises is about to embark on another venture. Poncho Sanchos, the faithful financial analyst, once again will examine the viability of this venture after 31 failures.A number of
Blue Sky Ltd. is considering the replacement of one of its older machines that is still capable of doing the job but is considerably inefficient. A new machine costing $150,000 will reduce annual
Midnight Oil and Gas is considering building a pipeline from a remote source of gas with only a 10-year supply of reserves. This qualifies the pipeline for a CCA rate of 20 percent rather than the
Investigation and a reasonable amount of footwork brought the following information to the attention of April Kehg, executive assistant to the board of Swiss Ventures Inc. She, with your able
Marceline Enterprises is considering an expansion to its amusement park. The cost of this expansion is pegged at $1 million but will require additional capital expenditures of $200,000 every three
In the previous problem, what is the P/E ratio if the firm sells at two times book value per share?Previous problemPhelps Labs has assets of $1,800,000, current liabilities of $595,000, and long-term
If the market value of a share of common stock is 2.8 times book value for 2015, what is the firm's P /E ratio for 2015?MARIS CORPORATIONIncome StatementYear ended December
Jim Kovacs Company makes supplies for schools. Sales in 2015 were $4,000,000. Assets were as follows:Cash................................................$ 100,000Accounts receivable .......... .
Assume in the previous problem that Cox Corporation used average cost inventory accounting instead of FIFO. What would gross profit be? What is the value of ending inventory?Data from previous
Porky's Sausage Co. shows the following values on its corporate books.Corporate Books:Initial amount ............................... .$10,000Deposits ......... .
Dr. Gupta Diagnostics' income statement for 2015 is as follows:Sales ................. . . .................................$2,000,000Cost of goods sold ........... . . . ............... .

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