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intermediate financial management

Financial Management And Policy 12th Edition James C. Van Horne - Solutions

The opportunity cost is greater than the savings. Therefore, the new production plan should not be undertaken.
4. Inventories after change = $48 million/6 = $8 million Present inventories = $48 million/8 = $6 million Additional inventories $2 million Opportunity cost = $2 million X .15 = $300,000
C.C h a p t e r 15 M a n a g e m e n t of A c c o u n t s R e c e i v a b l e a n d I n v e n t o r i e s 481 The lower the order cost, the more important carrying costs become relatively and the smaller the optimal order size.
b.Since the lot size is 1,000 filters, the company would order 6,000 filters each time. The lower the carrying cost, the more important ordering costs become relatively, and the larger the optimal order size.
3. a.Carrying costs = $.I0 x 1,000 = $100. The optimal order size would be 4,000 filters, which represents five orders a month.
To save $4,800 in bad-debt losses by identifying the high-risk category of new orders, the company must spend $8,000. Therefore, it should not undertake the credit analysis of new orders. This is a case where the size of the order is too small to justify credit analysis. After a new order is
Number of orders = $100,000/$50 = 2,000; credit analysis cost = 2,000 X $4 =$8,000.
2. As the bad-debt loss ratio for the high-risk category exceeds the profit margin of 22 percent, it would be desirable to reject orders from this risk class if such orders could be identified. However, the cost of credit information, as a percentage of the average order, is $4/$50 = $%, and this
1. Receivable turnover = 360/75 = 4.8 Profitability of additional sales = $9 million X .2 = $1,800,000 Additional receivables associated with the new sales= $9 million/4.8 = $1,875,000 Additional investment in receivables associated with the new sales= $1,875,000 X .8 = $1,500,000 New level of
Carrying costs are 5.65 per gallon per year. What is the best level of safety stock for the company?Solutions to S e l f - correction Problems
11. Fouchee 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 "lean" inventories, with the result that customers sometimes must be turned away. In an analysis of the situation, the company has
b. The vendor now offers Favorite Foods a quantity discount of $.02 per box if it buys cones in order sizes of 10,000 boxes. Should Favorite Foods avail itself of the quantity discount? (Hint: Determine the increase in carrying cost and decrease in ordering cost relative to your answer in parta.
a. Determine the optimal order quantity.
c. How many times per year would inventory be ordered?Chapter 15 Management of Accounts Receivable and Inventories 479 l0 Favorite Foods, Inc buys 50,000 boxes of ice cream cones every 2 months to service steady demand for the product. Order costs are $100 per order, and, ,-) carrying costs are
b. What are total inventory costs for Hedge (carrying costs plus ordering costs)?
a. Determine the economic order quantity of dints.
9. 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
b. Determine the economic order quantity.
a. Determine the total costs associated with ordering 1, 2, 5, 10, and 20 times a year.
8. 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, although the publisher allows the store a 20 percent discount on this price. The store figures that it costs
b. (1) If its costs were 74 percent of the selling price, would the order be accepted? (2) If 65 percent?
a. On the basis of this information, should Quigley accept the order?
Analyze the San Jose Company's application for credit. What positive factors are present? What negative factors are present?The Quigley Company sells and installs ski lifts. It has received an order from Alpine Ski Resort for a $2.3 million system. The production and installation costs of this
The San Jose Company has a Dun & Bradstreet rating of 4A-2. Inquiries into its banking disclosed balances generally in the low seven figurrs. Five suppliers to San Jose revealed that the firm takes its discounts from the three offering 2/10, net 30 terms, and it is about 15 days late in paying the
6. 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 Sheet (in millions)Assets Current assets Cash $ 1.5 5 1.6 $ 1.6 Receivables 1.3
5. 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 23 months, and the percentage of bad-debt losses is 4 percent.The company believes that if it were to double its collection
4. The Chickee 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 credit
3. Recalculate Problem 2, assuming the following pattern of bad-debt losses:Which policy now is best?
2. Upon reflection, Jefferson Knu Monroe Company has estimated that the following pattern of bad-debt losses will prevail if it initiates more liberal credit terms:Increase in sales Credit ~olicv 1A B C D Bad-debt losses on incremental sales 1 3% 6% 10% 15%Given the other assumptions in Problem 1,
1. To increase sales from their present annual $24 million, Jefferson Knu Monroe 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:from
4. To reduce production start-up costs, Bodden Truck Company may manufacture longer runs of the same truck. Estimated savings from the increase in ef476 Part V Liquidity and Working Capital Management ficiency are $260,000 per year. However, inventory turnover will decrease from eight times a year
c. What would be the optimal order quantity if ordering costs were $lo?
b. What would be the optimal order quantity if the carrying cost were$.05 a filter per month?
a. What is the optimal order quantity with respect to so many lot sizes?
3. Vostick Filter Company is a distributor of air filters to retail stores. It buys its filters from several manufacturers. Filters are ordered in lot sizes of 1,000, and each order costs $40 to place. Demand from retail stores is 20,000 filters per month, and carrying cost is $.I0 a filter per
2. Matlock Gauge Company makes wind and current gauges for pleasure boats.The gauges are sold throughout the southeast to boat dealers, and the average order size is $50. The company sells to all registered dealers without a credit analysis. Terms are net 45 days, and the average collection period
1. Durham-Feltz Corporation presently gives terms of net 30 days. It has $60 million in sales, and its average collection period is 45 days. To stimulate demand, the company may give terms of net 60 days. If it does instigate these terms, sales are expected to increase by 15 percent. After the
The floating-rate preferred is the most attractive after taxes, owing to the 70 percent exemption for federal income tax purposes. Commercial paper is less attractive than Treasury bills because of the state income tax from which Treasury bills are exempt. (In states with no income taxes, the
c. Since the opportunity cost of the present system ($87,500) exceeds the cost of the lockbox system ($75,000), the system should be initiated.Federal State Combined After- Tax Security Tax Tax Effect Expected Return Treasury bills .30 0 .30 (1 - .30)8.00% = 5.60%Commercial Paper .30 .07 .37 (1 -
b. 5% X $1,750,000 = $87,500
2.a. Total time savings = %days Time savings X Daily average collection = Reduction in cash balances achieved
f. Eurodollars 1 2 3 4 5 6 7 Evaluate the yield-risk trade-off for each instrument. Consider the appropriateness of each of these securities for the corporation's short-term investment account.m,-rip6 Solutions to S e lf- correction Problems 1.(31(11 (21 Expected Cost Level of Probabilify of
e. Government agency issues
d. Commercial paper
c. Certificates of deposit
b. Bankers' acceptances
a. Treasury bills
5. Research Project: Examine quotations in the Wall Street Journal for each of the following money market instruments:
b. If the opportunity cost of funds were 5 percent, what would be the optimal strategy?
a. If the opportunity cost of funds is 10 percent, which transfer procedure should be used for each of the restaurants?
4. Topple Tea Houses, Inc., operates seven restaurants in the state of Pennsylvania.The manager of each restaurant transfers funds daily from the local bank Chapter 14 L i q u i d i t y , Cash, and Marketable S e c u r i t i e s 445 to the company's principal bank in Harrisburg. There are
3. The Frazini Food Company has a weekly payroll of $150,000, paid on Friday.On average, its employees cash their checks in the following manner:Day Check Cleared on Percent of Company's Account Checks Cashed Friday 20 Monday 40 Tuesday 25 Wednesday 10 Thursdav 5 As treasurer of the company, how
b. In an effort to retain the business, the New Orleans bank has offered to handle the collections strictly on a fee basis (no compensating balance).What would be the maximum fee the New Orleans bank could charge and still retain List's business?
a. The List Company has discovered that it could divide the southern region into a southwestem region (with $1 million a day in collections, which could be handled by a Dallas bank for a $1 million compensating balance) and a southeastern region (with $2 million a day in collections, which could be
2. The List Company, which can earn 7 percent on money market instruments, currently has a lockbox arrangement with a New Orleans bank for its southem customers. The bank handles $3 million a day in return for a compensating balance of $2 million.
c. Rather than mail checks to its bank, the company could deliver them by messenger service. This procedure would reduce the overall delay by 1 day and cost $10,300 annually. Should the company undertake this plan?
b. To reduce this delay, the company is considering daily pickups from the stations. In all, two cars would be needed and two additional people hired. The cost would be $93,000 annually. This procedure would reduce the overall delay by 2 days. Currently, the opportunity cost of funds is 9 percent,
a. How much money is tied up in this interval of time?
1. Speedway Owl Company franchises Gas and Go stations in North Carolina and Virginia. All payments by franchisees for gasoline and oil products are by check, which average in total $420,000 a day. At present, the overall time between a check being mailed by the franchisee to Speedway Owl and the
3. Over the next year, El Pedro Steel Company, a California corporation, expects the following returns on continual investment in marketable securities:Treasury bills 8.00%Commercial paper 8.50 Floating-rate preferred stock 7.00 The company's marginal tax rate for federal income tax purposes is 30
c. If the annual cost of the lockbox system were $75,000, should such a system be initiated?
b. Determine the opportunity cost of the present system, assuming a 5 percent return on short-term instruments.
a. Determine the reduction in cash balances that can be achieved through the use of a lockbox system.
2. The Zindler Company currently has a centralized billing system. Payments are made by all customers to the central billing location. It requires, on the average, 4 days for customers' mailed payments to reach the central location. An additional 14days are required to process payments before a
1. The Zakuta Fish Company is in a cyclical, risky business. By maintaining liquidity, it lowers the possibility of going into bankruptcy. It is estimated that if bankruptcy were to occur, there would be a $100,000 present-value shortfall in what suppliers of capital would realize from the going
a higher debt ratio, and the sale of common stock. All of these things permit a high rate of growth in sales next year. Unless further changes in these directions occur, the SGR will decline in future years.
3.a. SGR = .75 (.04) (1.6667) = 8.11%.6667 - [.75(.04) (1.6667)]L JL >The company has moved from steady state with higher target operating efficiency,
Accounts payable = Purchases in March Retained earnings = $1,439 + Sales - Payment for purchases - Labor costs and - Other expenses, all for January through March
Accounts receivable = Sales in March X .8 + Sales in February X .I Inventories = $545 + Total purchases January through March - Total sales January through March X .6
c. Pro forma balance sheet, March 31 (in thousands):Cash $ 50 Accountspayable $ 450 Accounts receivable 620 Bank loan 400 Inventories 635 Accruals 212 -Current assets $1,305 Current liabilities $1,062 Net fixed assets 1,836 Long-term debt 450 Common stock 100 Retained earnings 1,529 -Total assets
2.a. Cash budget (in thousands):hv. Dec. Ian. Feb. Mar. Ap,:Sales $500 $600 Collections, current month's sales Collections, previous month's sales Collections, previous 2 months' sales Total cash receipts Purchases Payment for purchases Labor costs Other expenses Total cash disbursements Receipts
c. The company has had substantial capital expenditures and increases in accounts receivable and inventories. To finance this growth, which is greatly in excess of the growth in equity base, the company has leaned on the trade, has increased its accruals, and has increased its bank borrowings
c. Holding the other two ratios constant, what debt-to-equity ratio would be necessary?g r-: Solutions to S e l f - correction Problems Source and Use of Funds Statement for Serap-Jones, Inc.(in thousands)Sources Uses Funds provided by operations Net profit $172 Depreciation 189 Addition to fixed
. Holding the other two ratios constant, what net profit margin would be necessary?
a. Holding the other two target ratios constant, what assets-to-sales ratio would be necessary to attain the 35 percent sales increase?Chapter 13 Financial Planning 417
9. Hildebrand Hydronics 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 $.5 million in new equity by sale of stock to officers. No dividend is planned. Tentatively, the
b. If instead of these ratios, what would be the sustainable growth rate next year if the company moved from steady state and had the following targets? Assets-to-sales ratio, .42; net profit margin, .06; debt-toequity ratio, .45; dividend of $5 million; and no new equity financing.
a. Its target ratios are: assets-to-sales ratio, .40; net profit margin, .07;debt-to-equity ratio, .50; and earnings retention, .60. If these ratios correspond to steady state, what is its sustainable growth rate?
8. Liz Clairson Industries has $40 million in shareholders' equity and sales of$150 million last year.
c. The tax rate is 40 percent.
b. Depreciation is taken on a straight-line basis on $250,000 of assets with an average remaining life of 10 years and no salvage value. It is recorded as an operating expense apart from cost of goods sold.
a. Inventory at December 31,20x1, was $200,000.
7. Use the cash budget worked out in problem 6 and with the following gdditional information prepare a pro forma income statement for the first half of 20x2 for the Central City Department Store.
k. The company has a cash balance of $100,000 at December 31,20x1, which is the minimum desired level for cash. Funds can be borrowed in multiples of $5,000 on a monthly basis. (Ignore interest on such borrowings.)
j. A capital investment of $30,000 is planned in June.
i. A tax prepayment on 20x2 income of $50,000 is due in April.
h. Interest of $7,500 is due at the end of each calendar quarter.
g. Rent is $2,000 a month.
f. Wages and salaries are January $30,000 March $50,000 May $40,000 February 40,000 April 50,000 June 35,000
e. Payments for purchases of merchandise are 80 percent of the following month's anticipated sales.
d. Sales, actual and estimated, are 416 Part IV Tools of Financial Analysis and Control October 20x1 $300,000 March 20x2 $200,000 November 20x1 350,000 April 20x2 300,000 December 20x1 400,000 May 20x2 250,000 January 20x2 150,000 June 20x2 200,000 February20x2 200,000 July 20x2 300,000
c. In terms of credit sales, 60 percent are collected in the month after the sale, 30 percent in the second month, and 10 percent in the third. Baddebt losses are insignificant.
b. Sales are 75 percent for credit and 25 percent for cash.
a. All prices and costs remain constant.
6. Given the information that follows, prepare a cash budget for the Central City Department Store for the first 6 months of 20x2 under the following assump-tions:
5. Downeast Nautical Company expects sales of $2.4 million next year and expects sales of the same amount the following year. Sales are spread evenly throughout the year. On the basis of the following information, prepare a pro formabalance sheet and income statement for year end:Cash = minimum of
Sales and administrative expenses: $10,000 per month plus 10 percent of sales.All of these expenses are paid during the month of incurrence.Interest payments: Semiannual interest of $18,000 is paid during July. An annual$50,000 sinking-fund payment is also made at that time.Dividends: A $10,000
4. Prepare a cash budget for the Ace Manufacturing Company indicating receipts and disbursements for May, June, and July. The firm wishes to maintain a minimum cash balance of $20,000 at all times. Determine whether or not borrowing will be necessary during the period, and if it is, when and for
b. Prepare a source and use of working capital statement.
a. Prepare a source and use of funds statement for Sennet.

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