4. Antivirus, Inc., expects its sales next year to be $2,000,000. Inventory and
accounts receivable will increase by $430,000 to accommodate this sales level.
The company has a steady profit margin of 12 percent with a 25 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
8. Biochemical Corp. requires $500,000 in financing over the next three years.
The firm can borrow the funds for three years at 10.60 percent interest per year.
The CEO decides to do a forecast and predicts that if she utilizes short-term
financing instead, she will pay 7.25 percent interest in the first year, 11.90
percent interest in the second year, and 8.15 percent interest in the third year.
Determine the total interest cost under each plan. Which plan is less costly?
10. Assume that Hogan Surgical Instruments Co. has $2,000,000 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 $2,000,000 will be 10 percent, and
with a long-term financing plan, the financing costs on the $2,000,000 will be 12
percent. (Review Table 6–11 on page 178 for parts a, b, and c of this problem.)
a. Compute the anticipated return after financing costs with the most aggressive
b. Compute the anticipated return after financing costs with the most conservative
c . Compute the anticipated return after financing costs with the two moderate
approaches to the asset-financing mix.
d. Would you necessarily accept the plan with the highest return after financing
costs? Briefly explain.
2. 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 one and one-half 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 million per day in collections and $1 million
per day in disbursements, how many dollars will the cash management
system free up?
b. If Neon Light Company can earn 9 percent per annum on freed-up funds,
how much will the income be?
c. If the total cost of the new system is $375,000, should it be implemented?
7. Eco-Friendly Products has annual credit sales of $900,000 and an average
collection period of 30 days. Assume a 360-day year. What is the company’s
average accounts receivable balance? Accounts receivable are equal to the
average daily credit sales times the average collection period.
13. Fisk Corporation is trying to improve its inventory control system and has
installed an online computer at its retail stores. Fisk anticipates sales of 75,000
units per year, an ordering cost of $8 per order, and carrying costs of $1.20 per
a. What is the economic ordering quantity?
b. How many orders will be placed during the year?
c. What will the average inventory be?
d. What is the total cost of ordering and carrying inventory?
10. Talmud Book Company borrows $16,000 for 30 days at 9 percent interest. What
is the dollar cost of the loan?
Dollar cost of loan = Amount borrowed x Interest rate x Days loan is outstanding/ 360
14. The Dade Company is borrowing $300,000 for one year and paying
$27,000 in interest to Miami National Bank. The bank requires a 20 percent
compensating balance. What is the effective rate of interest? What would be
the effective rate if the company were required to make 12 monthly payments
to retire the loan? The principal, as used in Formula 8–6 on page 232, refers
to funds the firm can effectively utilize (Amount borrowed − Compensating
17. Your company plans to borrow $5 million for 12 months, and your banker gives
you a stated rate of 14 percent interest. You would like to know the effective
rate of interest for the following types of loans. (Each of the following parts
a. Simple 14 percent interest with a 10 percent compensating balance.
b. Discounted interest.
c. An installment loan (12 payments).
d. Discounted interest with a 5 percent compensating balance.