Question: Columbus Shipping Company is negotiating with two

> Sherwin Williams will receive $18,000 a year for the next 25 years as a result of a picture he has painted. If a discount rate of 10 percent is applied, should he be willing to sell out his future rights now for $160,000?

> The Denver Corporation has forecast the following sales for the first seven months of the year: Monthly material purchases are set equal to 30 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month

> John Longwaite will receive $100,000 in 50 years. His friends are very jealous of him. If the funds are discounted back at a rate of 14 percent, what is the present value of his future “pot of gold”?

> Mrs. Crawford will receive $6,500 a year for the next 14 years from her trust. If a 8 percent interest rate is applied, what is the current value of the future payments?

> You invest a single amount of $12,000 for 5 years at 10 percent. At the end of 5 years you take the proceeds and invest them for 12 years at 15 percent. How much will you have after 17 years?

> If you invest $8,000 per period for the following number of periods, how much would you have? a. 7 years at 9 percent. b. 40 years at 11 percent.

> How much would you have to invest today to receive: a. $12,000 in 6 years at 12 percent? b. $15,000 in 15 years at 8 percent? c. $5,000 each year for 10 years at 8 percent? d. $40,000 each year for 40 years at 5 percent?

> You are going to receive $200,000 in 50 years. What is the difference in present value between using a discount rate of 15 percent versus 5 percent?

> In Problem 7, if you had to wait until 12 years to get the $100,000, would your answer change? All other factors remain the same. Data from Problem 7: Your uncle offers you a choice of $100,000 in 10 years or $45,000 today. If money is discounted at 8 p

> Your uncle offers you a choice of $100,000 in 10 years or $45,000 today. If money is discounted at 8 percent, which should you choose?

> Your aunt offers you a choice of $20,000 in 50 years or $45 today. If money is discounted at 13 percent, which should you choose?

> If you invest $12,000 today, how much will you have: a. In 6 years at 7 percent? b. In 15 years at 12 percent? c. In 25 years at 10 percent? d. In 25 years at 10 percent (compounded semiannually)?

> Ultravision, Inc., anticipates sales of $240,000 from January through April. Materials will represent 50 percent of sales and because of level production, material purchases will be equal for each month during the four months of January, February, March,

> The difficult part of solving a problem of this nature is to know what to do with the information contained within a story problem. Therefore, this problem will be easier to complete if you rely on Chapter 4 for the format of all required schedules. The

> You will receive $4,000 three years from now. The discount rate is 10 percent. a. What is the value of your investment two years from now? Multiply $4,000 × .909 (one year’s discount rate at 10 percent). b. What is the value of your investment one year f

> a. What is the present value of $100,000 to be received after 40 years with an 18 percent discount rate? b. Would the present value of the funds in part a be enough to buy a $125 concert ticket?

> What is the present value of: a. $8,000 in 10 years at 6 percent? b. $16,000 in 5 years at 12 percent? c. $25,000 in 15 years at 8 percent?

> You invest $2,500 a year for three years at 8 percent. a. What is the value of your investment after one year? Multiply $2,500 × 1.08. b. What is the value of your investment after two years? Multiply your answer to part a by 1.08. c. What is the value

> Brittany (from problem 46) is now 18 years old (five years have passed), and she wants to get married instead of going to college. Your parents have accumulated the necessary funds for her education. Instead of her schooling, your parents are paying $10,

> Your younger sister, Brittany, will start college in five years. She has just informed your parents that she wants to go to Eastern State U., which will cost $30,000 per year for four years (cost assumed to come at the end of each year). Anticipating Bri

> You are chairperson of the investment fund for the Continental Soccer League. You are asked to set up a fund of semiannual payments to be compounded semiannually to accumulate a sum of $200,000 after 10 years at an 8 percent annual rate (20 payments). Th

> Jim Thorpe borrows $70,000 toward the purchase of a home at 12 percent interest. His mortgage is for 30 years. a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis fo

> If your aunt borrows $50,000 from the bank at 10 percent interest over the eight-year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest (round to the nearest dollar)? How much

> Kay Mart has purchased an annuity to begin payment at the end of 2113 (the date of the first payment). Assume it is now the beginning of 2011. The annuity is for $12,000 per year and is designed to last eight years. If the discount rate for the calculati

> Watt's Lighting Stores made the following sales projection for the next six months. All sales are credit sales. Sales in January and February were $33,000 and $32,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible,

> Kelly Greene has a contract in which she will receive the following payments for the next five years: $3,000, $4,000, $5,000, $6,000, and $7,000. She will then receive an annuity of $9,000 a year from the end of the sixth through the end of the 15th year

> Rusty Steele will receive the following payments at the end of the next three years: $4,000, $7,000, and $9,000. Then from the end of the fourth year through the end of the tenth year, he will receive an annuity of $10,000. At a discount rate of 10 perce

> You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement. During the period before retirement you can earn 8 percent annually, while after retirement you

> C. D. Rom has just given an insurance company $30,000. In return, he will receive an annuity of $3,200 for 20 years. At what rate of return must the insurance company invest this $30,000 in order to make the annual payments? Interpolate.

> On January 1, 2008, Mr. Dow bought 100 shares of stock at $12 per share. On December 31, 2010, he sold the stock for $18 per share. What is his annual rate of return? Interpolate to find the answer.

> Your grandfather has offered you a choice of one of the three following alternatives: $5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11 percent annually, which alternative should you choose? If yo

> Mr. Flint retired as president of Color Title Company but is currently on a consulting contract for $45,000 per year for the next 10 years. a. If Mr. Flint’s opportunity cost (potential return) is 10 percent, what is the present value of his consulting c

> What is an asset-backed public offering?

> What is the difference between pledging accounts receivable and factoring accounts receivable?

> Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.

> Simpson Glove Company has made the following sales projections for the next six months. All sales are credit sales. Sales in January and February were $41,000 and $39,000 respectively. Experience has shown that of total sales receipts 10 percent are unc

> What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?

> What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

> How have new banking laws influenced competition?

> Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?

> What is meant by hedging in the financial futures market to offset interest rate risks?

> Briefly discuss three types of lender control used in inventory financing.

> What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?

> A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should the financial manager recognize as the true cost of borrowing?

> What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?

> Under what circumstances would it be advisable to borrow money to take a cash discount?

> Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as: Experience has shown that 20 percent of sales receipts are collected in the month of sale, 70 percent in the following month, and 10 percent are never

> The treasurer for Thornton Pipe and Steel Company wishes to use financial futures to hedge her interest rate exposure. She will sell five Treasury futures contracts at $105,000 per contract. It is July and the contracts must be closed out in December of

> Texas Oil Supplies sells to the 12 accounts listed below. J&J Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account balances between 30 and 40 days; and 70 percent for account

> Bosworth Petroleum needs $500,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $8,100. a. What is the effective rate on the bank loan? b. How much would it cost (in percentage terms) if Boswo

> In problem 19, if the compensating balance requirement were 10 percent instead of 25 percent, would you change your answer? Do the appropriate calculation.

> The Ogden Timber Company buys from its suppliers on terms of 2/10, net 35. Ogden has not been utilizing the discount offered and has been taking 50 days to pay its bills. The suppliers seem to accept this payment pattern, and Ogden’s credit rating has no

> Mr. Paul Promptly is a very cautious businessman. His supplier offers trade credit terms of 3/10, net 70. Mr. Promptly 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 n

> Vroom Motorcycle Company is borrowing $30,000 from First State Bank. The total interest is $9,000. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment loan?

> If you borrow $12,000 at $900 interest for one year, what is your effective interest rate for the following payment plans? a. Annual payment. b. Semiannual payments. c. Quarterly payments. d. Monthly payments.

> 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 stands alone.) a.

> Sprint Shoes, Inc., had a beginning inventory of 9,000 units on January 1, 2010. The costs associated with the inventory were: During 2010, the firm produced 42,500 units with the following costs: Sales for the year were 47,250 units at $39.60 each. Sp

> Tucker Drilling Corp. plans to borrow $200,000. Northern National Bank will lend the money at one-half percentage point over the prime rate of 8½ percent (9 percent total) and requires a compensating balance of 20 percent. Principal in this case refers t

> The treasurer of Neiman Supermarkets is seeking a $30,000 loan for 180 days from Wrigley Bank and Trust. The stated interest rate is 10 percent and there is a 15 percent compensating balance requirement. The treasurer always keeps a minimum of $2,500 in

> Capone Child Care Centers, Inc., plans to borrow $250,000 for one year at 10 percent from the Chicago Bank and Trust Company. There is a 20 percent compensating balance requirement. Capone keeps minimum transaction balances of $18,000 in the normal cours

> Carey Company is borrowing $200,000 for one year at 12 percent from Second Intrastate Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest? What would the effective rate be if Carey were required to make 12 eq

> Digital Access, Inc., needs $400,000 in funds for a project. a. With a compensating balance requirement of 20 percent, how much will the firm need to borrow? b. Given your answer to part a and a stated interest rate of 9 percent on the total amount borro

> Maxim Air Filters, Inc., plans to borrow $300,000 for one year. Northeast National Bank will lend the money at 10 percent interest and requires a compensating balance of 20 percent. What is the effective rate of interest?

> Sampson Orange Juice Company normally takes 20 days to pay for its average daily credit purchases of $6,000. Its average daily sales are $7,000, and it collects accounts in 28 days. a. What is its net credit position? That is, compute its accounts receiv

> Mo and Chris’s Sporting Goods, Inc., borrows $14,500 for 20 days at 12 percent interest. What is the dollar cost of the loan? Use the formula: Interest Days loan is outstanding Days in the year (360) Dollar cost Amount of loan borro

> Ida Kline borrows $8,000 for 90 days and pays $180 interest. What is the effective rate of interest if the loan is discounted?

> I. M. Boring borrows $5,000 for one year at 13 percent interest. What is the effective rate of interest if the loan is discounted?

> Assume in Problem 14 that the Bradley Corporation used LIFO accounting instead of FIFO; what would its gross profit be? What would be the value of ending inventory? Data from Problem 14: The Bradley Corporation produces a product with the following cost

> Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your effective rate of interest?

> Your bank will lend you $4,000 for 45 days at a cost of $50 interest. What is your effective rate of interest?

> Delilah’s Haircuts can borrow from its bank at 13 percent to take a cash discount. The terms of the cash discount are 2/15, net 55. Should the firm borrow the funds?

> Compute the cost of not taking the following cash discounts. a. 2/10, net 40. b. 2/15, net 30. c. 2/10, net 45. d 3/10, net 90.

> Midland Chemical Co. is negotiating a loan from Manhattan Bank and Trust. The small chemical company needs to borrow $500,000. The bank offers a rate of 8 ¼ percent with a 20 percent compensating balance requirement, or as an alternative, 9¾ percent with

> If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?

> What are the 5 Cs of credit that are sometimes used by bankers and others to determine whether a potential loan will be repaid?

> What are three quantitative measures that can be applied to the collection policy of the firm?

> Use The Wall Street Journal or some other financial publication to find the going interest rates for the list of marketable securities in Table 7-1 on page 200. Which security would you choose for a short-term investment? Why?

> Why would a financial manager want to slow down disbursements?

> The Bradley Corporation produces a product with the following costs as of July 1, 2011: Beginning inventory at these costs on July 1 was 3,000 units. From July 1 to December 1, 2011, Bradley produced 12,000 units. These units had a material cost of $3,

> In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

> What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?

> Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?

> Why are Treasury bills a favorite place for financial managers to invest excess cash?

> Explain the similarities and differences of lockbox systems and regional collection offices.

> Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?

> Orbital Communications has operating plants in over 100 countries. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 100,000 kronas in Norway worth $35,000. The funds drew 12 percent interest, and the krona i

> If Dome offered a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $144,000 for your calculation of receivables.

> Assume that the new trade terms of 2/10, net 30 will increase sales by 15 percent because the discount makes the Dome’s price competitive. If Dome earns 20 percent on sales before discounts, should it offer the discount? (Consider the same variables as y

> If Dome reduces its bank loans, which cost 10 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm (don’t forget the 2 percent)? Should it offer the discount?

> At the end of January, Mineral Labs had an inventory of 725 units, which cost $10 per unit to produce. During February the company produced 650 units at a cost of $14 per unit. If the firm sold 1,000 units in February, what was the cost of goods sold? a.

> Dome Metals has credit sales of $144,000 yearly with credit terms of net 30 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take the full 30 days to pay. What is the average receivable

> If inventory turnover had only been 4 times: a. What would be the new value for inventory investment? b. What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing inc

> Global Services is considering a promotional campaign that will increase annual credit sales by $400,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: All $400,000

> Reconsider problem 19C. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended? Data from Problem 19C: Comiskey Fence Co. is evaluating the extension of credit to

> Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $180,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $15,700 in additional

> Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 8 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent; and acc

> Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove t

> Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $30,000, but inventory would increase by $250,000. Wisconsin Snowmobile have to finance the

> Diagnostic Supplies has expected sales of 135,000 units per year, carrying costs of $3 per unit, and an ordering cost of $4 per order. a. What is the economic order quantity? b. What is the average inventory? What is the total carrying cost? c. Assum

> In the second year, Fisk Corporation finds that it can reduce ordering costs to $2 per order but that carrying costs will stay the same at $1.20. Also, volume remains at 75,000 units. a. Recompute a, b, c, and d in Problem 13 for the second year. b. Now