1. Financial Management 1 Zaroni Samadi 23 June 2010

2.  Open book  Time: 45 minutes

3.  Your company may have the opportunity to make a one-time sale provided it grants a new customer 30 days credit.  The sales price of the item is $95, the variable cost is $68, and the relevant interest rate is 1.2 percent per month.  What is the net present value of this sale if there is a 30 percent chance the customer will default on payment?

4.  NPV = -$68 + [(1 .30)  $95] / (1 +.012) = -$68 + $65.71 = -$2.29

5.  On January 12, Jack’s purchased $3,250 worth of goods.  The terms of the sale are 3/10, net 20.  What is the cost of these goods if the payment is made on January 21?

6.  Cost of goods sold is discounted price = $3,250 × (1 −.03) = $3,152.50

7.  A firm has an accounts payable period of 43 days, an inventory period of 61 days, and an accounts receivable period of 37 days.  What is the length of the operating cycle?

8.  Operating cycle = 61 + 37 = 98 days

9.  Thomsen’s Supply has projected quarterly sales of $1,800, $2,200, $2,300, and $2,800, respectively, for the next year starting with the first quarter.  The accounts receivable period is 30 days. How much will the firm collect in Quarter 2? Assume that a quarter has 90 days.

10.  Quarter 2 collections = [(30 / 90)  $1,800] + [(60 / 90)  $2,200] = $2,066.67

11.  You have a $90,000 line of credit with your local bank.  The interest rate is 7.5 percent compounded quarterly.  The loan agreement requires that 5 percent of the unused amount be maintained at the bank in a non-interest bearing account.  On average, you earn a rate of 1.25 percent per quarter on your short-term investments.  What is the effective annual rate of this agreement assuming you borrow the entire amount for the entire year?

12.  Effective rate = [1 + (.075 / 4)] 4  1 =.07714 = 7.71 percent

13.  When you reconciled your checkbook to the bank, you had outstanding deposits of $6,418 and outstanding checks of $8,207.  Your adjusted check book balance is $4,509. What is the amount of the collection float?

14.  the amount of the collection float is outstanding deposits $6,418

15.  On average, Lancaster, Inc. receives 100 checks each day.  The average amount of each check is $8,300.  The firm is considering installing a lockbox system which will reduce the average collection time by 2 days.  The bank will charge $.28 a check for the lockbox arrangement.  The daily interest rate on Treasury bills is.015 percent.  What is the net present value of the lockbox arrangement?

16.  Net present value = [100  $8,300  2] – [(100  $.28) /.00015] = $1,660,000  $186,667 = $1,473,333

17.  You are analyzing a firm that receives an average of 280 checks each day with an average amount of $22 per check.  These checks clear the bank on average in 1.5 days.  The applicable daily interest rate is.01 percent.  What is the present value of the float assuming that each month has 30 days?

18.  Present value of the float = 280  $22  1.5 = $9,240

19.  Your firm is debating whether to lease or to buy an asset.  The asset costs $27,000, has a 3-year life, and will be worthless after the 3 years.  Leasing the asset will cost $9,500 a year.  Your firm uses straight-line depreciation and has a tax rate of 34 percent.  What is the incremental cash flow for year 3 if your firm decides to lease rather than buy?

20.  CF 3 = -1  [$9,500  (1 .34) + ($27,000 / 3 .34)] = -1 × [$6,270 + $3,060] = -$9,330