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principles managerial finance
Principles Of Managerial Finance 7th Edition Lawrence J Gitman, Chad J Zutter - Solutions
E15–3 Jasmine Scents has been given two competing offers for short-term financing. Both offers are for borrowing $15,000 for 1 year. The first offer is a discount loan at 8%, and the second offer is for interest to be paid at maturity at a stated interest rate of 9%. Calculate the effective
E15–2 Cleaner’s, Inc., is switching to paying employees every 2 weeks rather than weekly and will therefore “skip” 1 week’s pay. The firm has 25 employees who work a 60-hour week and earn an average wage of $12.50 per hour. Using a 10% rate of interest, how much will this change save the
E15–1 Lyman Nurseries purchased seeds costing $25,000 with terms of 3/15 net 30 EOM on January 12. How much will the firm pay if it takes the cash discount? What is the approximate cost of giving up the cash discount, using the simplified formula?
15–14 For the following methods of using inventory as short-term loan collateral, describe the basic features of each, and compare their use: (a) floating lien, (b) trust receipt loan, and (c) warehouse receipt loan.
15–13 Describe and compare the basic features of the following methods of using accounts receivable to obtain short-term financing: (a) pledging accounts receivable and (b) factoring accounts receivable. Be sure to mention the institutions that offer each of them.
15–12 In general, what interest rates and fees are levied on secured short-term loans? Why are these rates generally higher than the rates on unsecured short-term loans?
15–11 Are secured short-term loans viewed as more risky or less risky than unsecured short-term loans? Why?
15–10 What is the important difference between international and domestic transactions? How is a letter of credit used in financing international trade transactions? How is “netting” used in transactions between subsidiaries?
15–9 How do firms use commercial paper to raise short-term funds? Who can issue commercial paper? Who buys commercial paper?
15–8 What is a revolving credit agreement? How does this arrangement differ from the line-of-credit agreement? What is a commitment fee?
15–7 What is a line of credit? Describe each of the following features that are often included in these agreements: (a) operating-change restrictions,(b) compensating balance, and (c) annual cleanup.
15–6 What are the basic terms and characteristics of a single-payment note?How is the effective annual rate on such a note found?
15–5 How does the effective annual rate differ between a loan requiring interest payments at maturity and another, similar loan requiring interest in advance?
15–4 How is the prime rate of interest relevant to the cost of short-term bank borrowing? What is a floating-rate loan?
15–3 What is “stretching accounts payable”? What effect does this action have on the cost of giving up a cash discount?
15–2 Is there a cost associated with taking a cash discount? Is there any cost associated with giving up a cash discount? How do short-term borrowing costs affect the cash discount decision?
15–1 What are the two major sources of spontaneous short-term financing for a firm? How do their balances behave relative to the firm’s sales?
1.. Why might financial managers still be tempted to manage earnings when a clawback is a legitimate possibility?On June 2, 2010, Diebold, Inc., agreed to pay a $25 million fine to settle accounting fraud charges brought by the U.S. Securities and Exchange Commission (SEC). According to the SEC,
LG 6 Describe the various ways in which inventory can be used as short-term-loan collateral.
LG 5 Explain the characteristics of secured short-term loans and the use of accounts receivable as short-term-loan collateral.
LG 4 Discuss the basic features of commercial paper and the key aspects of international short-term loans.
LG 3 Describe interest rates and the basic types of unsecured bank sources of short-term loans.
LG 2 Understand the effects of stretching accounts payable on their cost and the use of accruals.
LG 1 Review accounts payable, the key components of credit terms, and the procedures for analyzing those terms.
1.. The current balance in accounts receivable for Eboy Corporation is $443,000. This level was achieved with annual (365 days) credit sales of $3,544,000. The firm offers its customers credit terms of net 30. However, in an effort to help its cash flow position and to follow the actions of its
P14–18 ETHICS PROBLEM A group of angry shareholders has placed a corporate resolution before all shareholders at a company’s annual stockholders’ meeting. The resolution demands that the company stretch its accounts payable because these shareholders have determined that all the company’s
P14–17 Management of cash balance Alexis Morris, an assistant manager at a local department store, gets paid every 2 weeks by direct deposit into her checking account. This account pays no interest and has no minimum balance requirement. Her monthly income is $4,200. Alexis has a “target”
P14–16 Zero-balance account Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaining the zero-balance account, the firm will have to pay a monthly fee
P14–15 Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the
P14–14 Float Simon Corporation has daily cash receipts of $65,000. A recent analysis of its collections indicated that customers’ payments were in the mail an average of 2.0 days. Once received, the payments are processed in 2.0 days. After payments are deposited, it takes an average of 2.5
P14–13 Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has $345,000 in variable costs. The change in credit terms is expected to increase
P14–12 Shortening the credit period A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 1.5% to 1% of sales. The firm
P14–11 Initiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm’s current average collection period is 60 days, sales are 40,000 units, selling price is
P14–10 Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collection
P14–9 Accounts receivable changes with bad debts A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is$15. As a result of the proposed change,
P14–8 Accounts receivable changes without bad debts Tara’s Textiles currently has credit sales of $360 million per year and an average collection period of 60 days. Assume that the price of Tara’s products is $60 per unit and that the variable costs are $55 per unit. The firm is considering
P14–6 EOQ, reorder point, and safety stock Alexis Company uses 800 units of a product per year on a continuous basis. The product has a fixed cost of $50 per order, and its carrying cost is $2 per unit per year. It takes 5 days to receive a shipment after an order is placed, and the firm wishes
P14–5 EOQ analysis Tiger Corporation purchases 1,200,000 units per year of one component.The fixed cost per order is $25. The annual carrying cost of the item is 27% of its $2 cost.a. Determine the EOQ if (1) the conditions stated above hold, (2) the order cost is zero rather than $25, and (3)
P14–3 Multiple changes in cash conversion cycle Garrett Industries turns over its inventory six times each year; it has an average collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are $3 million. Assume that there is no difference in the investment
P14–2 Changing cash conversion cycle Camp Manufacturing turns over its inventory five times each year, has an average payment period of 35 days, and has an average collection period of 60 days. The firm has annual sales of $3.5 million and cost of goods sold of $2.4 million.a. Calculate the
P14–1 Cash conversion cycle American Products is concerned about managing cash efficiently.On the average, inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales of about $30
E14–5 Klein’s Tools is considering offering a cash discount to speed up the collection of accounts receivable. Currently, the firm has an average collection period of 65 days, annual sales are 35,000 units, the per-unit price is $40, and the per-unit variable cost is $29. A 2% cash discount is
E14–4 Forrester Fashions has annual credit sales of 250,000 units with an average collection period of 70 days. The company has a per-unit variable cost of $20 and a perunit sale price of $30. Bad debts currently are 5% of sales. The firm estimates that a proposed relaxation of credit standards
E14–3 Mama Leone’s Frozen Pizzas uses 50,000 pounds of cheese per year. Each pound costs $2.50. The ordering cost for the cheese is $250 per order, and its carrying cost is $0.50 per pound per year. Calculate the firm’s economic order quantity (EOQ)for the cheese. Mama Leone’s operates 250
E14–2 Icy Treats, Inc., is a seasonal business that sells frozen desserts. At the peak of its summer selling season, the firm has $35,000 in cash, $125,000 in inventory,$70,000 in accounts receivable, and $65,000 in accounts payable. During the slow winter period, the firm holds $10,000 in cash,
E14–1 Everdeen, Inc., has a 100-day operating cycle. If its average age of inventory is 35 days, how long is its average collection period? If its average payment period is 30 days, what is its cash conversion cycle? Place all this information on a time line similar to Figure 14.2 on page 556.
ST14–3 Relaxing credit standards Regency Rug Repair Company is trying to decide whether it should relax its credit standards. The firm repairs 72,000 rugs per year at an average price of $32 each. Bad-debt expenses are 1% of sales, the average collection period is 40 days, and the variable cost
ST14–2 EOQ analysis Thompson Paint Company uses 60,000 gallons of pigment per year.The cost of ordering pigment is $200 per order, and the cost of carrying the pigment in inventory is $1 per gallon per year. The firm uses pigment at a constant rate every day throughout the year.a. Calculate the
ST14–1 Cash conversion cycle Hurkin Manufacturing Company pays accounts payable on the tenth day after purchase. The average collection period is 30 days, and the average age of inventory is 40 days. The firm currently has annual sales of about$18 million and purchases of $14 million. The firm is
14–21 What two characteristics make a security marketable? Why are the yields on nongovernment marketable securities generally higher than the yields on government issues with similar maturities?
14–20 What are three mechanisms of cash concentration? What is the objective of using a zero-balance account (ZBA) in a cash concentration system?
14–19 What are the three main advantages of cash concentration?
14–18 What are the firm’s objectives with regard to collection float and to payment float?
14–17 What is float, and what are its three components?
14–16 Why should a firm actively monitor the accounts receivable of its credit customers? How are the average collection period and an aging schedule used for credit monitoring?
14–15 Why do a firm’s regular credit terms typically conform to those of its industry?
14–14 Why are the risks involved in international credit management more complex than those associated with purely domestic credit sales?
14–13 What are the basic trade-offs in a tightening of credit standards?
14–12 Explain why credit scoring is typically applied to consumer credit decisions rather than to mercantile credit decisions.
14–11 What is the role of the five C’s of credit in the credit selection activity?
14–10 What factors make managing inventory more difficult for exporters and multinational companies?
14–9 Briefly describe the following techniques for managing inventory: (1) ABC system, economic order quantity (EOQ) model, (2) just-in-time (JIT) system, and (3) three computerized systems for resource control, MRP, MRP II, and ERP.
14–8 What are likely to be the viewpoints of each of the following managers about the levels of the various types of inventory: finance, marketing, manufacturing, and purchasing? Why is inventory an investment?
1.. What problem might occur with the full implementation of RFID technology in retail industries? Specifically, consider the amount of data that might be collected. Wal-Mart Stores, Inc., the world’s number one retailer, operates almost 11,000 retail units under 55 different banners in 27
14–7 Why is it important for a firm to minimize the length of its cash conversion cycle?
14–6 What are the benefits, costs, and risks of an aggressive funding strategy and of a conservative funding strategy? Under which strategy is the borrowing often in excess of the actual need?
14–5 Why is it helpful to divide the funding needs of a seasonal business into its permanent and seasonal funding requirements when developing a funding strategy?
14–4 What is the difference between the firm’s operating cycle and its cash conversion cycle?
14–3 Why does an increase in the ratio of current assets to total assets decrease both profits and risk as measured by net working capital? How do changes in the ratio of current liabilities to total assets affect profitability and risk?
14–2 What is the relationship between the predictability of a firm’s cash inflows and its required level of net working capital? How are net working capital, liquidity, and risk of insolvency related?
14–1 Why is working capital management one of the most important and time-consuming activities of the financial manager? What is net working capital?
LG 6 Understand the management of receipts and disbursements, including float, speeding up collections, slowing down payments, cash concentration, zerobalance accounts, and investing in marketable securities.
LG 5 Review the procedures for quantitatively considering cash discount changes, other aspects of credit terms, and credit monitoring.
LG 4 Explain the credit selection process and the quantitative procedure for evaluating changes in credit standards.
LG 3 Discuss inventory management: differing views, common techniques, and international concerns.
LG 2 Describe the cash conversion cycle, its funding requirements, and the key strategies for managing it.
LG 1 Understand working capital management, net working capital, and the related trade-off between profitability and risk.
1.. One way to lower the market price of a firm’s stock is via a stock split. Rock-O Corporation finds itself in a different situation: Its stock has been selling at relatively low prices. To increase the market price of the stock, the company chooses to use a reverse stock split of 2-for-3.The
P13–19 ETHICS PROBLEM Assume that you are the CFO of a company contemplating a stock repurchase next quarter. You know that there are several methods of reducing the current quarterly earnings, which may cause the stock price to fall prior to the announcement of the proposed stock repurchase.
P13–14 Stock splits Nathan Detroit owns 400 shares of the food company General Mills, Inc., which he purchased during the recession in January 2009 for $35 per share.General Mills is regarded as a relatively safe company because it provides a basic product that consumers need in good and bad
P13–12 Stock dividend: Investor Security Data Company has outstanding 50,000 shares of common stock currently selling at $40 per share. The firm most recently had earnings available for common stockholders of $120,000, but it has decided to retain these funds and is considering either a 5% or a
P13–11 Stock dividend: Investor Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain its
P13–5 Dividend constraints A firm has $800,000 in paid-in capital, retained earnings of$40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders.a. What is the most the
P13–3 Residual dividend policy As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockholder has asked you to estimate the amount of the dividend that
P13–2 Dividend payment Kathy Snow wishes to purchase shares of Countdown Computing, Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12.a. What is the last day that Kathy can purchase the stock (trade date) and still
E13–2 Chancellor Industries has retained earnings available of $1.2 million. The firm plans to make two investments that require financing of $950,000 and $1.75 million, respectively.Chancellor uses a target capital structure with 60% debt and 40% equity.Apply the residual theory to determine
E13–1 Stephanie’s Cafes, Inc., has declared a dividend of $1.30 per share for shareholders of record on Tuesday, May 2. The firm has 200,000 shares outstanding and will pay the dividend on May 24. How much cash will be needed to pay the dividend? When will the stock begin selling ex dividend?
13–12 Compare a stock split with a stock dividend.
13–11 Why do firms issue stock dividends? Comment on the following statement:“I have a stock that promises to pay a 20 percent stock dividend every year, and therefore it guarantees that I will break even in 5 years.”
13–10 Describe a constant-payout-ratio dividend policy, a regular dividend policy, and a low-regular-and-extra dividend policy. What are the effects of these policies?
13–9 What five factors do firms consider in establishing dividend policy?Briefly describe each of them?
13–8 Contrast the basic arguments about dividend policy advanced by Miller and Modigliani (M and M) and by Gordon and Lintner.
13–7 Does following the residual theory of dividends lead to a stable dividend?Is this approach consistent with dividend relevance?
13–6 What benefit is available to participants in a dividend reinvestment plan? How might the firm benefit?
13–5 What effect did the Jobs and Growth Tax Relief Reconciliation Act of 2003 have on the taxation of corporate dividends? On corporate dividend payouts?
13–4 Who are holders of record? When does a stock sell ex dividend?
13–3 The dividend payout ratio equals dividends paid divided by earnings.How would you expect this ratio to behave during a recession? What about during an economic boom?
13–2 Why do rapidly growing firms generally pay no dividends?
13–1 What are the two ways that firms can distribute cash to shareholders?
1..Do you agree that corporate managers would manipulate their stock’s value prior to a buyback, or do you believe that corporations are more likely to initiate a buyback to enhance shareholder value? When CBS announced in March 2007 that it would buy back $1.4 billion worth of stock, its sagging
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