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BUSI320 Corporate Finance2013 FallB (Moten)
Exam 2
2.Problem 64 External financing [LO1]
Antivirus, Inc., expects its sales next year to be $4,400,000. Inventory and accounts receivable will increase by $670,000 to accommodate this sales level. The company has a steady profit margin of 20 percent with a 40 percent dividend payout. 
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the “$” sign in your response.) 
External funds needed 
$ [removed] 
5.Problem 610 Optimal policy mix [LO5]
Assume that Hogan Surgical Instruments Co. has $3,000,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 18 percent, but with a highliquidity plan, the return will be 14 percent. If the firm goes with a shortterm financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a longterm financing plan, the financing costs on the $3,000,000 will be 12 percent. 
(a) 
Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) 
(b) 
Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) 
(c) 
Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) 

Anticipated return 
Low liquidity 

High liquidity 

8.Problem 614 Conservative versus aggressive financing [LO5]
Collins Systems, Inc., is trying to develop an assetfinancing plan. The firm has $550,000 in temporary current assets and $450,000 in permanent current assets. Collins also has $650,000 in fixed assets. 
(a) 
Construct two alternative financing plans for the firm. One of the plans should be conservative, with 90 percent of assets financed by longterm sources and the rest financed by shortterm sources. The other plan should be aggressive, with only 10 percent of assets financed by longterm sources and the remaining assets financed by shortterm sources. The current interest rate is 10 percent on longterm funds and 5 percent on shortterm financing. Compute the annual interest payments under each plan.(Omit the “$” sign in your response.) 

Total interest 

Conservative 
$ [removed] 

Aggressive 
$ [removed] 

(b) 
Given that Collins’s earnings before interest and taxes are $430,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 30 percent. (Omit the “$” sign in your response.) 

Earning 
Conservative 
$ [removed] 
Aggressive 
$ [removed] 
rev: 09_29_2011
10.Problem 616 Expectations hypothesis and interest rates [LO4]
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Round your answers to 2 decimal places. Omit the “%” sign in your response.) 

1year Tbill at beginning of year 1 
1year Tbill at beginning of year 2 
1year Tbill at beginning of year 3 
1year Tbill at beginning of year 4 

Expected return 
2 year security 

3 year security 

4 year security 

11.Problem 618 Interest costs under alternative plans [LO3]
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: 






January 
$ 
8,400 
April 
$ 
8,400 
February 

2,400 
May 

9,400 
March 

3,400 
June 

4,400 
Shortterm financing will be utilized for the next six months. Projected annual interest rates are: 






January 
8.0 
% 
April 
15.0 
% 
February 
9.0 

May 
12.0 

March 
12.0 

June 
12.0 

(a) 
Compute total dollar interest payments for the six months. (Round your intermediate and final answers to 2 decimal places. Omit the “$” sign in your response.) 
Total dollar interest payments 
$ [removed] 
(b1) 
Compute the total dollar interest payments if longterm financing at 12 percent had been utilized throughout the six months? (Omit the “$” sign in your response.) 
Total dollar interest payments 
$ [removed] 
(b2) 
If longterm financing at 12 percent had been utilized throughout the six months, would the total dollar interest payments be larger or smaller? 


rev: 12_14_2012
14.Problem 613 Impact of term structure of interest rates on financing plan [LO4]
Winfrey Diet Food Corp. has $5,050,000 in assets. 



Temporary current assets 
$ 
2,100,000 
Permanent current assets 

1,555,000 
Fixed assets 

1,395,000 


Total assets 
$ 
5,050,000 


Shortterm rates are 14 percent. Longterm rates are 12 percent. Earnings before interest and taxes are $1,070,000. The tax rate is 30 percent. 

What will earnings after taxes be? (Omit the “$” sign in your response.) 
Earnings after taxes 
$ [removed] 
rev: 03182011, 04182012, 06_23_2012
15.Problem 72 Costbenefit analysis of cash management [LO2]
Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by onehalf day without offending suppliers. The bank has a remote disbursement center in Florida. 
(a) 
If Neon Light Company has $2.65 million per day in collections and $1.13 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) 
Freedup funds 
$ [removed] 
(b) 
If Neon Light Company can earn 9 percent per annum on freedup funds, how much will the income be?(Enter your answer in dollars not in millions. Omit the “$” sign in your response.) 
Interest on freedup cash 
$ [removed] 
(c) 
If the total cost of the new system is $440,000, should it be implemented? 


17.Problem 710 Determination of credit sales [LO4]
Mervyn’s Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $87,500. What is the value of its credit sales? (Use 360 days in a year. Omit the “$” sign in your response) 
18. Problem 711 Aging of accounts receivable [LO4]
Route Canal Shipping Company has the following schedule for aging of accounts receivable: 
Age of receivables 

(1) 
(2) 
(3) 
(4) 

Month of 
Age of 
Amounts 
Percent of 

April 
0–30 
$ 
156,240 
_______ 
March 
31–60 
78,120 
_______ 

February 
61–90 
117,180 
_______ 

January 
91–120 
39,060 
_______ 



Total receivables 
$ 
390,600 
100% 



(a) 
Calculate the percentage of amount due for each month. (Omit the “%” sign in your response.) 
Month of sales 
Percent of 
April 

March 

February 

January 



Total receivables 



(b) 
If the firm had $1,512,000 in credit sales over the fourmonth period, compute the average collection period. Average daily sales should be based on a 120day period. 
Average collection period 
(c) 
If the firm likes to see its bills collected in 36 days, should it be satisfied with the average collection period? 
(d) 
Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied? 
20.Problem 715 Economic ordering quantity with safety stock [LO5]
Diagnostic Supplies has expected sales of 120,000 units per year, a carrying cost of $6 per unit, and an ordering cost of $9 per order. 
(a) 
What is the economic order quantity? 
Economic order quantity 
(b1) 
What is average inventory? 
(b2) 
What is the total carrying cost? (Omit the “$” sign in your response.) 
Total carrying cost 
Assume an additional 90 units of inventory will be required as safety stock. 
(c1) 
What will the new average inventory be? 
(c2) 
What will the new total carrying cost be? (Omit the “$” sign in your response.) 
Total carrying cost 
26.Problem 722 Credit policy and return on investment [LO4]
Global Services is considering a promotional campaign that will increase annual credit sales by $560,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: 


Accounts receivable 
4x 
Inventory 
2x 
Plant and equipment 
4x 
All $560,000 of the sales will be collectible. However, collection costs will be 2 percent of sales, and production and selling costs will be 76 percent of sales. The cost to carry inventory will be 5 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 35 percent. 
(a) 
What is the value for inventory investment? (Omit the “$” sign in your response.) 
Inventory investment 
$ [removed] 
(b1) 
Compute the total investment. (Omit the “$” sign in your response.) 
Total investment 
$ [removed] 
(b2) 
Compute the cost of carrying inventory. (Omit the “$” sign in your response.) 
Cost of carrying inventory 
$ [removed] 
(b3) 
Compute income after taxes. (Omit the “$” sign in your response.) 
Income after taxes 
$ [removed] 
(b4) 
What would be the return on investment? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) 
Return on investment 
[removed] % 
(b5) 
If the required rate of return is 12 percent, should the campaign be undertaken? 


29.Problem 82 Cash discount decision [LO1]
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. 
(a) 
Compute the cost of not taking the cash discount. (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.) 
Cost of not taking a cash discount 
(b) 
Should the firm borrow the funds? 




31.Problem 87 Effective rate on discounted loan [LO2]
Mary Ott is going to borrow $7,300 for 90 days and pay $221 interest. 
What is the effective rate of interest if the loan is discounted? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.) 
Effective rate on discounted loan 
[removed]% 
33.Problem 810 Dollar cost of a loan [LO2]
Talmud Book Company borrows $18,100 for 45 days at 11 percent interest. 
What is the dollar cost of the loan? (Use 360 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.) 
Cost of loan 
$ [removed] 



39.Problem 818 Effective rate under different terms [LO2]
If you borrow $3,500 at $590 interest for one year, what is your effective interest rate for the following payment plans? (Round your answers to 2 decimal places. Omit the “%” sign in your response.) 

Effective rate 
(a) Annual payment 
[removed] % 
(b) Semiannual payments 
[removed] % 
(c) Quarterly payments 
[removed] % 
(d) Monthly payments 
[removed] % 
40.Problem 821 Cash discount under special circumstance [LO2]
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/14, net 70. Mr. Warner never takes the discount offered, but he pays his suppliers in 60 days rather than the 70 days allowed so he is sure the payments are never late. 
What is Mr. Warner’s cost of not taking the cash discount? (Use 360 days in a year. Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.) 
Cost of not taking a cash discount 
43.Problem 827 Accounts receivable financing [LO1]
Charmin Paper Company sells to the 12 accounts listed below. 
Account 
Receivable 
Average age of 

A 
$ 
63,700 


20 

B 

197,000 


44 

C 

74,400 


16 

D 

23,600 


61 

E 

59,600 


43 

F 

318,000 


39 

G 

33,300 


17 

H 

309,000 


67 

I 

46,600 


33 

J 

90,300 


52 

K 

277,000 


15 

L 

65,900 


39 

Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 31 and 40 days; and 70 percent for account balances between 41 and 45 days. Customers that take over 45 days to pay their bills are not considered acceptable accounts for a loan. 
The current prime rate is 16.50 percent, and Capital charges 3.50 percent over prime to Charmin as its annual loan rate. 
(a) 
Determine the maximum loan for which Charmin Paper Company could qualify. (Omit the “$” sign in your response.) 
Maximum loan amount 
$ [removed] 
(b) 
Determine how much one month’s interest expense would be on the loan balance determined in part a.(Round your final answer to 2 decimal places. Omit the “$” sign in your response.) 
Interest expense 
$ [removed] 
rev: 10_26_2012
45.Problem 88 Prime vs. LIBOR [LO2]
Dr. Ruth is going to borrow $8,200 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 9 percent and LIBOR 2.5 percent less. Also assume there will be a $50 transaction fee with LIBOR (this amount must be added to the interest cost with LIBOR). 
Which loan has the lower effective interest cost? (Use 360 days in a year.) 

46.Problem 92 Present value [LO3]
What is the present value of: 

(a) 
$8,400 in 12 years at 11 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
(b) 
$17,200 in 6 years at 9 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
(c) 
$26,800 in 18 years at 10 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
47.Problem 94 Present value [LO4]
You will receive $9,000 three years from now. The discount rate is 13 percent. 
(a) 
What is the value of your investment two years from now? Multiply $9,000 × .885 (one year’s discount rate at 13 percent). (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
Value of investment 
$ 
(b) 
What is the value of your investment one year from now? Multiply your answer to part a by .885 (one year’s discount rate at 13 percent). (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.) 
Value of investment 
$ 
(c) 
What is the value of your investment today? Multiply your answer to part b by .885 (one year’s discount rate at 13 percent). (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.) 
Value of investment 
$ 
(d) 
Calculate the present value by going to Appendix B (present value of $1) for n = 3 and i = 13%. Multiply this tabular value by $9,000 and compare your answer to the answer in part c. There may be a slight difference due to rounding. (Round “PV Factor” to 3 decimal places and final answer to 2 decimal places. Omit the “$” sign in your response.) 
49.Problem 97 Present value [LO3]
Your uncle offers you the choice of $115,000 in 10 years or $54,000 today. Use Appendix B. 
(a) 
Calculate the present value of $115,000, if the money is discounted at 11 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
(b) 
Which choice should you choose? 




50.Problem 98 Present value [LO3]
Your uncle offers you the choice of $107,000 in 10 years or $40,000 today. Use Appendix B. 
(a) 
Calculate the present value of $107,000, if the money is discounted at 8 percent? (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
(b) 
Which choice should you choose? 




(c) 
Calculate the present value, if you had to wait until 12 years to get the $107,000. (Round “PV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
(d) 
Now, which choice should you choose? 


54. Problem 925 Quarterly compounding [LO5]
Cousin Bertha invested $116,000 10 years ago at 8 percent, compounded quarterly. How much has she accumulated? Use Appendix A. (Round “FV Factor” to 3 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) 
55. Problem 926 Special compounding [LO5]
Determine the amount of money in a savings account at the end of one year, given an initial deposit of $12,000 and an 4 percent annual interest rate when interest is compounded (a) annually, (b) semiannually, and (c) quarterly. Use Appendix A. (Round “FV Factor” to 3 decimal places and final answers to the nearest dollar amount. Omit the “$” sign in your response.) 

Future value 
(a) Annually 
$ [removed] 
(b) Semiannually 
$ [removed] 
(c) Quarterly 
$ [removed] 
61.Problem 938 Deferred annuity [LO3]
Rusty Steele will receive the following payments at the end of the next three years: $23,000, $26,000, and $28,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $29,000. 
At a discount rate of 16 percent, what is the present value of all future benefits? Use Appendix B and Appendix D. (Round “PV Factor” to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the “$” sign in your response.) 
Present value of all future benefits 
$ [removed] 
rev: 07252011
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