Question: How is transaction exposure different from

> Explain how lockboxes are used?

> Ginseng Company collects 50 percent of its receivables in 10 days or fewer, 31 percent in 11 to 30 days, 7 percent in 31 to 45 days, 7 percent in 46 to 60 days, and 5 percent in more than 60 days. The company has $1,213,000 in accounts receivable. Prepar

> Hazel Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.1 days. Hazel Corp.’s remittances average $37,000 a day, and the average check is $125. The bank charges $0.37 per processed check. Assume that the

> Jennifer Electrical is evaluating whether a lockbox it is currently using is worth keeping. Management estimates that the lockbox reduces the mail float by 1.8 days and the processing by half a day. The remittances average $50,000 a day for Jennifer Elec

> Lansdowne Electronics has a formal line of credit of $1 million for up to three years with HND Bank. The interest rate on the loan is 5.3 percent, and under the agreement, Lansdowne has to pay an annual fee of 50 basis points on the unused amount. Suppos

> Gruppa, Inc., has just set up a formal line of credit of $10 million with First Community Commercial Bank. The line of credit is good for up to five years. The bank will charge Gruppa an interest rate of 6.25 percent on any amount borrowed, and the firm

> The Colonial Window Treatments Company is borrowing $1.5 million. The loan requires a 10 percent compensating balance, and the effective interest rate on the loan is 9.75 percent. What is the stated APR on this loan?

> The Clarkson Designer Company Management wants to borrow $750,000.The bank will provide the loan at an APR of 6.875 percent. Since the loan calls for a compensating balance, the effective interest rate is actually 9.25 percent. What is the compensating b

> Longhorn Traders is one of the largest RV dealers in Austin, Texas, and sells about 2,800 recreational vehicles a year. The cost of placing an order with Longhorn’s supplier is $800, and the inventory carrying costs are $150 for each RV. Management likes

> Suppose a biotech company in Boston, Massachusetts, completes an $85 million IPO priced to the public at $75 per share. The firm receives $72 per share, and the out-of-pocket expenses are $340,000. The stock’s closing price at the end of the first day is

> Given the data for Telecraft Enterprises in problem 14.21, re-estimate the firm’s operating cycle if days’ sales outstanding decreased to 75 days. For the same level of net sales, what is the implied dollar value of receivables with 75 days’ sales outsta

> Why can cash investment in inventory be costly?

> Telecraft Enterprises carries 45 days of inventory in its stores. Last year Telecraft reported net sales of $1,400,000 and the company had receivables of $325,000 at the end of the year. What is the operating cycle at Telecraft?

> Premier Corp. has net sales of $812,344, and cost of goods sold equal to 70 percent of net sales. Assume all sales are credit sales. If the firm’s accounts receivable total $113,902 and its operating cycle is 81.6 days, how much inventory does the firm h

> Aviva Technology’s operating cycle is 81 days. Its inventory was $134,000 at the end of last year, and the company had cost of goods sold of $1.1 million. How long does it take Aviva to collect its receivables on average?

> Joanna Handicrafts, Inc., has net sales of $4.23 million with 50 percent being credit sales. Its cost of goods sold is $2.54 million. The firm’s cash conversion cycle is 47.9 days and its operating cycle is 86.3 days. What is the firm’s accounts payable?

> Elsee, Inc., has net sales of $13 million, and 75 percent of these are credit sales. Its cost of goods sold is 65 percent of annual net sales. The firm’s cash conversion cycle is 41.3 days. The inventory balance at the firm is $1,817,344, while its accou

> Blackwell Automotive, Inc., reported the following financial information for the last fiscal year. Calculate the firm’s cash conversion cycle and operating cycle? Blackwell Automotive, Inc. Assets Liabilities and Equity Cash and ma

> Your boss asks you to compute your company’s cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $26,300, accounts receivable averaged $17,900, and accounts payable averaged $15,100. You also se

> Winegartner Cosmetics management is setting up a line of credit at the company’s bank for $5 million for up to two years. The interest rate is 5.875 percent and the loan agreement calls for an annual fee of 40 basis points on any unused balance for the y

> Maltz Landscaping has an average collection period of 38 days for its accounts receivable. Currently, Maltz factors all of its receivables at a 2 percent discount. What is the effective annual interest rate on the financing from the factor?

> Morgan Contractors borrowed $1.75 million at an APR of 10.2 percent. The loan called for a compensating balance of 12 percent. What is the effective interest rate on the loan?

> What does “4/15, net 30” mean?

> The Kellogg Bank requires borrowers to keep an 8 percent compensating balance. Gorman Jewels borrows $340,000 at a 7 percent stated APR. What is the effective interest rate on the loan?

> Pacific Traders has annual sales of $1,895,000. The firm’s financial manager has determined that using a lockbox will reduce collection time by 2.3 days. If the firm’s opportunity cost on savings is 5.25 percent, what are the savings from using the lockb

> Why might a negotiated sale be the lowest cost means of issuing a complex debt security?

> Mill Street Corporation sells its goods with terms of 4/10 EOM, net 60. What is the implicit cost of the trade credit?

> Sybex Corp. sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?

> Describe the risks that are associated with a restrictive current asset management strategy?

> A majority of firms choose a firm-commitment underwriting arrangement rather than a best-effort arrangement for their IPO? Explain why.

> Based on your knowledge from this and previous chapters, what are some methods an investment banker uses to determine an IPO price? What factors will play a significant role in the calculation?

> Cerberus Security Company produces a cash flow of $200 per year and is expected to continue doing so in the infinite future. The cost of equity capital for Cerberus is 20 percent, and the firm is financed entirely with equity. Management would like to re

> If the spot rate was $1.0413/C$ and the 90-day forward rate was $1.0507/C$, how much more (in U.S. dollars) would you receive by selling C$ 1,000,000 at the forward rate than at the spot rate?

> What are the two general current asset management strategies discussed in this section, and how do they differ?

> Explain the relation between each pair of currencies. Spot Rate $1.655/ £ Forward Rate а. $1.6001/£ b. ¥104.45/S ¥102.33/S C$1.1121/$ C$1.0940/$ с.

> Toyota is interested in borrowing $5 million for 90 days. Bank of America has quoted a rate that is 1.125 percent under the prime rate of 6.25 percent. Daiwa Bank is offering Toyota a rate that is 0.75 percent over the three-month LIBOR of 4.2 percent. W

> IBM’s German unit is looking to borrow €7.5 million from Deutsche Bank. Deutsche Bank quotes a rate of three-month LIBOR plus 0.25 percent for the 90-day loan. Currently, the three-month LIBOR is 3.875 percent. What is IBM’s interest cost on the loan in

> Caterpillar, Inc. management is trying to decide between selling a new bond issue in the U.S. or the Eurodollar bond market. In either market the bonds will be denominated in dollars and will have a three-year maturity. The domestic bond will have a coup

> The Boeing Company has two different debt issues, both maturing four years from now. The domestic bond issue pays semiannual coupons and has a coupon rate of 4.80 percent. The current price on the bond is $962.75. The Eurobond issue is priced at $964.33

> Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set up a plant in Alabama, where Kia Motors has an auto assembly plant for its SUVs. The cost of this plant will be $13.5 million. The current spot rate is 1

> Barrington Fertilizers, Inc., exports its specialized lawn care products to Canada. It made a sale worth C$1,150,000, with the payment due in 90 days. Barrington’s banker gave it a forward quote of $0.9021/C$. By using the forward rate, the firm gained a

> Covington Industries just sold equipment to a Mexican firm. Payment of 11,315,000 pesos will be due to Covington in 30 days. Covington has the option of selling the pesos today at a 30-day forward rate of $0.05139/peso. If it waits 30 days to sell the pe

> Tricolor Industries has purchased equipment from a Brazilian firm for a total cost of 272,500 Brazilian reals. The firm has to pay in 30 days. Citibank has given the firm a 30-day forward quote of $0.2715/real. Assume that on the day the payment is due,

> Alcor Pharma just received revenues of $3,165,300 in Australian dollars (A$). Management has the following exchange rates: A$1.08010/£ and $1.5906/£. What is the U.S. dollar value of the company’s revenues?

> What is the operating cycle, and how is it related to the cash conversion cycle?

> Banco Santiago wants to make a bid-ask spread of 0.65 percent on its foreign exchange transactions. If the ask rate on the Mexican peso (MP) is MP18.3092/$, what does the bid rate have to be?

> The foreign exchange department of Bank of America has a bid quote on Canadian dollars (C$) of C$1.0800/$. If the bank typically tries to make a bid-ask spread of 0.5 percent on these foreign exchange transactions, what will the ask rate have to be?

> The spot rate of the Australian dollar (A$) is A$1.1667/$. The Australian dollar is quoted at a 30-day forward premium of 4.90 percent against the U.S. dollar. What is the 30-day forward quote?

> The foreign exchange department at Tokyo’s Daiwa Bank quoted the spot rate on the euro at €0.007269/¥. The 90-day forward rate is quoted at a premium of 5.42 percent on the euro. What is the 90-day forward rate?

> Ford Motor Company maintains production facilities in many different countries including Brazil, Taiwan, and the United States. Given the data in Exhibit 21.6, which production plant is likely to face the greatest country risk? How does country risk affe

> Use the data in Exhibit 21.5 to answer these questions: a. What is the six-month forward rate (in U.S. dollars) for Swiss francs? Is the Swiss franc selling for a premium or a discount? b. What is the six-month forward rate (in U.S. dollars) for the Jap

> Like owners of stock, owners of options can lose no more than the amount they invested. They are far more likely to lose that full amount, but they cannot lose more. Do sellers of options have the same limitation on their losses?

> What is the value of a call option if the stock price is zero? What if the stock price is extremely high (relative to the strike price)?

> What does the seller of a put option hope will happen?

> What are some of the trade-offs required in the management of working capital accounts?

> Husky Motors has two debt issues outstanding, both of which mature in five years. The senior debt issue, which has a face value of $10 million, must be paid in full before any of the principal for the junior debt issue is paid. The junior debt issue also

> Two call options have been written on the same underlying stock. Call #1 has a strike price of $42, and call #2 has a strike price of $52. Call #1 is selling for $5.00, and call #2 is selling for $6.00. What arbitrage opportunity do these prices present

> The price of a stock that does not pay dividends is currently $35, and the risk-free rate is 4 percent. A European call option on the stock, with a strike price of $35 and which expires in six months, sells for $3.04. A European put option on the same st

> What is the payoff for a call option with a strike price of $50 if the stock price at expiration is $40? What if the stock price is $65?

> SpinTheWheel Co. has assets currently worth $10 million in the form of one-year risk-free bonds that will return 10 percent. The company has debt with a face value of $5.5 million due in one year. (No interest payments will be made.) The stockholders dec

> What costs would a firm following a flexible current asset management strategy consider, and why?

> List some of the working capital management practices you would expect to see in a manufacturing company following just-in-time inventory practices?

> What factors must a financial manager consider when making decisions about accounts receivable?

> Stardust, Inc., is an exporter of plumbing fixtures. About 30 percent of its sales are made in Canada. The sales department just found out that the Canadian dollar is at a premium against the U.S. dollar based on the 90-day forward rate, while the 180-da

> A Canadian cooperative of wheat farmers sold wheat to a grain company in Russia. Under what circumstances will the Canadian farmers be exposed to foreign exchange risk? When will the Russian importer be facing foreign exchange risk?

> What types of conflicts arise with leases and why?

> In the United States, managers are asked to focus on maximizing stockholder value. Is this consistent with the goals of managers in Germany and Japan?

> International economic integration and technological changes in the last couple of decades have dramatically increased globalization across many industries. Explain how a biotech firm or a medical firm (for example, a hospital) can take advantage of thes

> Give examples of U.S. banks facing different risks in international lending?

> Royal Dutch Shell, an oil company, has headquarters in both the Netherlands and the United Kingdom. What type of firm is it?

> You own ABC Corp. bonds. Using option pricing theory, explain what agency concerns you would have if ABC were in danger of bankruptcy?

> Corporations frequently include employee stock options as a part of the compensation for their managers and sometimes for all of their employees. These options allow the holder to buy the stock of the company for a preset price like any other option, but

> Future Enterprises is considering building a factory that will include an option to expand operations in three years. If things go well, the anticipated expansion will have a value of $10 million and will cost $2 million to undertake. Otherwise, the anti

> Explain why, in the binomial pricing theory, the probabilities of an upward move versus a downward move are not important?

> An American option will never be worth less than a European option. Evaluate this statement?

> A bond covenant is a part of a bond contract that restricts the behavior of the firm, barring it from taking certain actions. Using the terminology of options, explain why a bond contract might include a covenant preventing the firm from making large div

> What is a lease? What are the two types of leases?

> What are some benefits of using debt financing?

> 1. Bob employs a maid to clean his house. He pays her $1,040 during the current year. What is the proper tax treatment of the Social Security and Medicare tax for the maid? a. Bob is not required to pay or withhold Social Security and Medicare taxes on t

> 1. Which of the following amounts paid by an employer to an employee is not subject to withholding? a. Salary b. Bonus c. Commissions d. Reimbursement of expenses under an accountable plan e. All of the above are subject to withholding 2. Abbe, age 56,

> 1. In 2016, Mary sells for $14,000 a machine used in her business. The property was purchased on May 1, 2014, at a cost of $13,000. Mary has claimed depreciation on the machine of $8,000. What is the amount and nature of Mary’s gain as a result of the sa

> 1. All of the following assets are capital assets, except: a. A personal automobile b. IBM stock c. A child’s bicycle d. Personal furniture e. Used car inventory held by a car dealer 2. Which of the following is a capital asset? a. Account receivable b.

> 1. Kevin purchased a house 20 years ago for $100,000 and he has always lived in the house. Three years ago Kevin married Karen, and she has lived in the house since their marriage. If they sell Kevin’s house in December 2016 for $425,000, what is their t

> 1. Assume that a taxpayer purchases a computer in 2016 that has an estimated useful life of 10 years. If the computer is used 100 percent for business and no election to expense was made, what is the MACRS recovery period that must be used for cost recov

> 1. E Corporation is a subchapter S corporation owned by three individuals with calendar year-ends. The corporation sells a sports drink as its principal product and has similar sales each month. What options does E Corporation have in choosing a tax year

> Indicate whether the following statements are true or false: ______Decreasing one’s tax liability through legal methods is called tax avoidance, while illegally reducing taxes is called tax evasion. ______In a “closed” transaction, all tax-significant ev

> For each of the following situations, indicate the amount of the penalty that could be imposed on the tax return preparer: a. A tax return preparer understates the taxpayer’s tax liability with a frivolous position and does not disclose the position. b.

> Indicate the date that the statute of limitations would run out on each of the following individual tax returns: a. A fraudulent 2016 tax return that was filed April 15, 2017. b. A 2016 tax return that was filed May 19, 2017. c. A 2016 tax return that wa

> Explain the use of the mid-quarter convention for MACRS depreciation:

> 7. Indicate whether the following statements are true or false: ________The tax law includes a penalty for writing a “bad” check in payment of the taxpayer’s tax liability. ________The statute of limitations for a tax return is normally 4 years. ________

> For each of the following situations, indicate the nature and amount of the penalty that could be imposed. Description of the Penalty Penalty Amount a. Larry is a tax protester and files his tax return in the name of“Mickey Mouse." b. Anne writes a

> Linda underpaid her taxes for the current year by $4,000 due to negligence. a. Calculate Linda’s accuracy-related penalty for negligence. b. Assume that the underpayment of taxes by Linda was determined to be fraudulent, and calculate the total amount of

> In the 2016 tax year, Michelle paid the following amounts relating to her 2014 tax return: Tax deficiency…………………………………………………$5,000 Negligence penalty…………………………………………...1,000 Interest………………………………………………………………500 Underpayment of estimated tax penalty…………..

> a. Wilson filed his individual tax return on the original due date, but failed to pay $700 in taxes that were due with the return. If Wilson pays the taxes exactly 2 months late, calculate the amount of his failure-to-pay penalty. b. Joan filed her indiv

> Indicate whether the following statements are true or false: _______A field audit by the IRS is an audit conducted at the IRS field office. _______A low Discriminant Function System score for a tax return increases the possibility that the return will be

> Indicate which of the following statements are true or false: _______The IRS is a division of the Treasury Department. _______The IRS has four major divisions. _______The IRS local offices process most individual tax returns. _______IRS Campus Processing

> Go to the IRS website (www.irs.gov) and print out a copy of the most recent Schedule K-1 of Form 1120S.

> Cypress Corporation has regular taxable income of $170,000 (assume annual gross receipts are greater than $7.5 million) and a regular tax liability of $49,550 for 2016. The corporation also has tax preference items amounting to $105,000. Calculate Cypres

> Grevilla Corporation is a manufacturing company. The corporation has accumulated earnings of $950,000, and it can establish reasonable needs for $400,000 of that amount. Calculate the amount of the accumulated earnings tax (if any) that Grevilla Corporat

> Give the MACRS depreciation life of the following assets: a. An automobile _____________________ b. Business furniture _____________________ c. A computer _____________________ d. Residential real estate _____________________ e. Commercial real estate __