Solved by verified expert :2.Problem 6-4 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

$

5.Problem 6-10 Optimal policy mix [LO5]

Assume that Hogan Surgical Instruments

Co. has $3,000,000 in assets. If it goes with a low-liquidity plan for the

assets, it can earn a return of 18 percent, but with a high-liquidity plan,

the return will be 14 percent. If the firm goes with a short-term financing

plan, the financing costs on the $3,000,000 will be 10 percent, and with a

long-term 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 asset-financing mix.(Omit the “$” sign in your response.)

Anticipated return

(b)

Compute the anticipated return

after financing costs with the most conservative asset-financing mix.(Omit the “$” sign in your response.)

Anticipated return

(c)

Compute the anticipated return

after financing costs with the two moderate approaches to the asset-financing

mix.(Omit the “$” sign in your

response.)

Anticipated

return

Low liquidity

High liquidity

8.Problem 6-14 Conservative versus aggressive

financing [LO5]

Collins Systems, Inc., is trying

to develop an asset-financing 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 long-term sources and the rest financed by

short-term sources. The other plan should be aggressive, with only 10 percent

of assets financed by long-term sources and the remaining assets financed by

short-term sources. The current interest rate is 10 percent on long-term

funds and 5 percent on short-term financing. Compute the annual interest

payments under each plan.(Omit the “$”

sign in your response.)

Total

interest

Conservative

$

Aggressive

$

(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

after taxes

Conservative

$

Aggressive

$

rev: 09_29_2011

10.Problem 6-16 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.)

1-year T-bill at

beginning of year 1

1-year T-bill at beginning

of year 2

1-year T-bill at

beginning of year 3

1-year T-bill at

beginning of year 4

Expected

return

2 year security

3 year security

4 year security

11.Problem 6-18 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

Short-term 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

$

(b-1)

Compute the total dollar interest

payments if long-term financing at 12 percent had been utilized throughout

the six months?(Omit the “$” sign

in your response.)

Total dollar interest

payments

$

(b-2)

If long-term 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 6-13 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

Short-term rates are 14 percent.

Long-term 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

$

rev: 03-18-2011,

04-18-2012, 06_23_2012

15.Problem 7-2 Cost-benefit 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 one-half 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.)

Freed-up funds

$

(b)

If Neon Light Company can earn 9

percent per annum on freed-up funds, how much will the income be?(Enter your answer in dollars not in millions. Omit the

“$” sign in your response.)

Interest on freed-up

cash

$

(c)

If the total cost of the new

system is $440,000, should it be implemented?

17.Problem 7-10 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)

Credit sales

$