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manager? Discuss the advantages and/or disadvantages to receivables float and payables float.
8. How does a lock boxconcentration banking system
impact a firm’s float?
9. When does a company move cash from its noninterestbearing demand account to marketable securities? Chapter 12 10. What are the three components of a firm’s credit policy? What does each entail?
11. What special considerations enter the credit granting
decision when the customer is paying in a foreign
currency? Problems
1. (Calculating working capital) A company’s current
asset balance is $500,000. Calculate its working capital and current ratio if its current liabilities equal:
a. $200,000
b. $350,000 c. $500,000
d. $650,000 2. (Calculating working capital) A company’s working capital equals $2,000,000. Calculate its balance of
current liabilities and its current ratio if the company’s current assets equal:
a. $6,000,000
b. $5,000,000 c. $4,000,000
d. $3,000,000 3. (Changes to working capital) A company has current assets of $1,500,000 and current liabilities of
$800,000. Calculate the change to the company’s
working capital and current ratio from the following
transactions (treat each case separately):
a. Collecting $100,000 of accounts receivable
b. Paying $100,000 of accounts payable
c. Purchasing $100,000 of plant and equipment for
cash
d. Selling $100,000 of common stock
4. (Changes to working capital) A company has current assets of $5,000,000 and current liabilities of
$2,000,000. Calculate the change to the company’s
working capital and current ratio from the following
transactions (treat each case separately):
a. Purchasing $500,000 of inventory on credit (accounts payable)
b. Recording $500,000 of depreciation
c. Moving $500,000 from cash to marketable securities
d. Recognizing $500,000 of receipts in advance as being earned
5. (Perpetuity analysis) A company with a 11% cost
of capital is considering an investment that would
cost it $300,000 today in return for a perpetuity of
benefits of $45,000.
a. Calculate the project’s NPV
b. Calculate the project’s IRR
c. Calculate the project’s NAB
d. Should the investment be accepted? (Interpret your
results from parts a, b, and c.) Investing in Permanent Working Capital Assets 307 6. (Perpetuity analysis) A company with a 9% cost of
capital is considering scaling back its operations.
$1,750,000 would be released from investment in current assets, but the firm would forgo a perpetuity of
benefits of $250,000.
a. Calculate the project’s NPV
b. Calculate the project’s IRR
c. Calculate the project’s NAB
d. Should the investment be accepted? (Interpret your
results from parts a, b, and c)
7. (Funds in transit) It takes three days on average for
customers’ checks, averaging $75,000 per day, to reach
a company. Also, the company makes deposits averaging $60,000 to its bank account one day before its
checks clear. The company has a 12% cost of capital.
a. What is the amount of idle money
(1) In the mail?
(2) In the bank?
b. What is the total amount of idle money in transit?
c. What is the annual cost of the funds
(1) In the mail?
(2) In the bank?
d. What is the total annual cost of the idle funds?
8. (Funds in transit) It takes six days on average for
customers’ checks, averaging $200,000 per day, to
reach a company. Also, the company makes deposits
averaging $160,000 to its bank account onehalf day
before its checks clear. The company has a 10% cost
of capital.
a. What is the amount of idle money
(1) In the mail?
(2) In the bank?
b. What is the total amount of idle money in transit?
c. What is the annual cost of the funds
(1) In the mail?
(2) In the bank?
d. What is the total annual cost of the idle funds?
9. (Accelerating collections) A company receives cash
inflows of US$6 million per day from customers in
North America. Checks take six days on average to
arrive, but a large commercial bank has proposed to
implement a lock boxconcentration banking system
for a $3 million annual fee which would cut the time
a check is in receivables float to an average of three
days. The company’s marginal tax rate is 35%. What
is the value of the proposed system to the company,
and should it be implemented, if the company’s cost
of capital is:
a. 8%?
b. 10%? c. 12%?
d. 15%? 308 Part IV Adding Value 10. (Accelerating collections) A company with a 12%
cost of capital receives cash inflows from customers
throughout the United States and Canada. Checks
take 5 days on average to arrive, but a large commercial bank has proposed to implement a lock boxconcentration banking system for a $250,000 annual
fee which would cut the time a check is in receivables
float to an average of 1 1/2 days. The company’s marginal tax rate is 35%. What is the value of the proposed system to the company, and should it be implemented, if the company’s daily cash inflows
average:
a. $150,000?
b. $300,000? c. $450,000?
d. $600,000? 11. (Credit standards) A company is considering extending credit to a group of customers who have not
previously met t...
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This note was uploaded on 03/15/2013 for the course FIN 250 taught by Professor Kim during the Spring '13 term at Medgar Evers College.
 Spring '13
 Kim
 Finance, Investing

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