Question;Chapter 15 of Foundations of Finance. Write;approximately 900 words for all of the answers combined.;?Review Questions;15-5:Define the hedging principle. How can this;principle be used in the management of working;capital?;15-6:Define the following terms;a.;Permanent asset investments;b.;Temporary asset investments;c.;Permanent sources of financing;d.;Temporary sources of financing;e.;Spontaneous sources of financing;15-13: Define the following;a.;Line of credit;b.;Commercial paper;c.;Compensating balance;d.;Prime rate;?Study Problems;15-2: (Estimating the cost of commercial paper) On February 3;2010, the Burlington Western Company;plans;a commercial paper issue of $20 million. The firm has never used commercial;paper before;but;has been assured by the firm placing the issue that it will have no difficulty;raising the funds.;The;commercial paper will carry a 270-day maturity and require interest based on a;rate of 11 percent;per;annum. In addition, the firm will have to pay fees totaling $200,000 to bring;the issue to;market;and place it. What is the effective cost of the commercial paper to Burlington;Western?;15-3: (Cost;of trade credit) Calculate the effective cost of the following trade credit;terms when payment;is;made on the net due date.;a.;2/10, net 30;b.;3/15, net 30;c.;3/15, net 45;d.;2/15, net 60;15-5: (Cost of;short-term financing) The R. Morin Construction Company needs to borrow;$100,000;to;help finance the cost of a new $150,000 hydraulic crane used in the firm?s;commercial construction;business.;The crane will pay for itself in 1 year, and the firm is considering the;following alternatives;for;financing its purchase;Alternative;A?The firm?s bank has agreed to lend the $100,000 at a rate of 14 percent.;Interest;would;be discounted, and a 15 percent compensating balance would be required.;However;the;compensating-balance requirement would not be binding on R. Morin because the firm;normally;maintains a minimum demand deposit (checking account) balance of $25,000 in;the;bank.;Alternative;B?The equipment dealer has agreed to finance the equipment with a 1-year loan.;The;$100,000 loan would require payment of principal and interest totaling $116,300.;a.;Which alternative should R. Morin select?;b.;If the bank?s compensating-balance requirement were to necessitate idle demand;deposits;equal;to 15 percent of the loan, what effect would this have on the cost of the bank;loan;alternative?;15-7: (Cost;of commercial paper) Tri-State Enterprises plans to issue commercial paper for;the first;time;in the firm?s 35-year history. The firm plans to issue $500,000 in 180-day;maturity notes. The;paper;will carry a 10 1?2 percent rate with discounted interest and will cost;Tri-State $12,000 (paid in;advance);to issue.;a.;What is the effective cost of credit to Tri-State?;b.;What other factors should the company consider in analyzing whether to issue;the commercial;paper?;15-8: (Cost of accounts receivable) Johnson Enterprises Inc. is;involved in the manufacture and sale;of;electronic components used in small AM/FM radios. The firm needs $300,000 to;finance an;anticipated;expansion in receivables due to increased sales. Johnson?s credit terms are net;60;and;its average monthly credit sales are $200,000. In general, the firm?s customers;pay within;the;credit period, thus, the firm?s average accounts receivable balance is;$400,000. Chuck Idol;Johnson?s;comptroller, approached the firm?s bank with a request for a loan for the;$300,000 using;the;firm?s accounts receivable as collateral. The bank offered to make a loan at a;rate of;2;percent over prime plus a 1 percent processing charge on all receivables;pledged ($200,000 per;month).;Furthermore, the bank agreed to lend up to 75 percent of the face value of the;receivables;pledged.;a.;Estimate the cost of the receivables loan to Johnson when the firm borrows the;$300,000.;The;prime rate is currently 11 percent.;b.;Idol also requested a line of credit for $300,000 from the bank. The bank;agreed to grant;the;necessary line of credit at a rate of 3 percent over prime and required a 15;percent compensating;balance.;Johnson currently maintains an average demand deposit of $80,000.;Estimate;the cost of the line of credit to Johnson.;c.;Which source of credit should Johnson select? Why?;15-9: (Cost;of factoring) MDM Inc. is considering factoring its receivables. The firm has;credit sales;of;$400,000 per month and has an average receivables balance of $800,000 with;60-day credit terms.;The;factor has offered to extend credit equal to 90 percent of the receivables;factored less interest;on;the loan at a rate of 11?2 percent per month. The 10 percent difference in the;advance and the face;value;of all receivables factored consists of a 1 percent factoring fee plus a 9;percent reserve, which;the;factor maintains. In addition, if MDM Inc. decides to factor its receivables;it will sell them all;so;that it can reduce its credit department costs by $1,500 a month.;a.;What is the cost of borrowing the maximum amount of credit available to MDM;Inc.;through;the factoring agreement?;b.;What considerations other than cost should be accounted for by MDM Inc. in;determining;whether;to enter the factoring agreement?;15-11: (Cost of short-term financing) You plan to borrow $20,000;from the bank to pay for inventories;for;a gift shop you have just opened. The bank offers to lend you the money at 10;percent annual;interest;for the 6 months the funds will be needed.;a.;Calculate the effective rate of interest on the loan.;b.;In addition, the bank requires you to maintain a 15 percent compensating;balance in the;bank.;Because you are just opening your business, you do not have a demand deposit;account;at;the bank that can be used to meet the compensating-balance requirement. This;means;that you will have to put up 15 percent of the loan amount from your own;personal;money;(which you had planned to use to help finance the business) in a checking;account.;What;is the cost of the loan now?;c.;In addition to the compensating-balance requirement in part b, you are told;that interest;will;be discounted. What is the effective rate of interest on the loan now?;15-12: (Cost;of factoring) A factor has agreed to lend the JVC Corporation working capital;on the;following;terms: JVC?s receivables average $100,000 per month and have a 90-day average;collection;period.;(Note that JVC?s credit terms call for payment in 90 days, and accounts;receivable average;$300,000;because of the 90-day average collection period.) The factor will charge 12;percent;interest;on any advance (1 percent per month paid in advance) and a 2 percent processing;fee on all;receivables;factored and will maintain a 20 percent reserve. If JVC undertakes the loan, it;will reduce;its;own credit department expenses by $2,000 per month. What is the annual;effective rate of;interest;to JVC on the factoring arrangement? Assume that the maximum advance is taken.;15-14: (Cash conversion cycle) Sims Electric Corp.;has been striving for the last five years to improve;its;management of working capital. Historical data for the firm?s sales, accounts;receivable, inventories;and;accounts payable follow;a.;Calculate Sims? days of sales outstanding and days of sales in inventory for;each of the five;years.;What has Sims accomplished in its attempts to better manage its investments in;accounts;receivable;and inventory?;b.;Calculate Sims? cash conversion cycle for each of the five years. Evaluate;Sims? overall management;of;its working capital.
Paper#41035 | Written in 18-Jul-2015Price : $35