Fundamentals of Managing Finance Chap 12

What does each entail 11 what special considerations

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Unformatted text preview: inancial manager? Discuss the advantages and/or disadvantages to receivables float and payables float. 8. How does a lock box-concentration banking system impact a firm’s float? 9. When does a company move cash from its noninterest-bearing 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 one-half 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 box-concentration 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.

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