BUSI-320 Corporate Finance-2013 Fall-B Exam 2

Antivirus, Inc., expects its sales next year to be $4,400,000. Inventory and accounts receivable will increase by $670,000 to accommodate this sales level. The company has a steady profit margin of 20 percent with a 40 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 financing. (Omit the "$" sign in your response.)

External funds needed

$

Assume that Hogan Surgical Instruments Co. has $3,000,000 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 $3,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,000,000 will be 12 percent.

(a)

Compute the anticipated return after financing costs with the most aggressive asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(b)

Compute the anticipated return after financing costs with the most conservative asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

(c)

Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.(Omit the "$" sign in your response.)

Anticipated return

Low liquidity

High liquidity

Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $550,000 in temporary current assets and $450,000 in permanent current assets. Collins also has $650,000 in fixed assets.

(a)

Construct two alternative financing plans for the firm. One of the plans should be conservative, with 90 percent of assets financed by long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 10 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 10 percent on long-term funds and 5 percent on short-term financing. Compute the annual interest payments under each plan.(Omit the "$" sign in your response.)

Total interest

Conservative

$

Aggressive

$

(b)

Given that Collins’s earnings before interest and taxes are $430,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 30 percent.(Omit the "$" sign in your response.)

Earning
after taxes

Conservative

$

Aggressive

$

Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Round your answers to 2 decimal places. Omit the "%" sign in your response.)

1-year T-bill at beginning of year 1

1-year T-bill at beginning of year 2

1-year T-bill at beginning of year 3

1-year T-bill at beginning of year 4

Expected return

2 year security

3 year security

4 year security

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

January

$

8,400

April

$

8,400

February

2,400

May

9,400

March

3,400

June

4,400

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

January

8.0

%

April

15.0

%

February

9.0

May

12.0

March

12.0

June

12.0

(a)

Compute total dollar interest payments for the six months.(Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Total dollar interest payments

$

(b-1)

Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months?(Omit the "$" sign in your response.)

Total dollar interest payments

$

(b-2)

If long-term financing at 12 percent had been utilized throughout the six months, would the total dollar interest payments be larger or smaller?

Winfrey Diet Food Corp. has $5,050,000 in assets.

Temporary current assets

$

2,100,000

Permanent current assets

1,555,000

Fixed assets

1,395,000

Total assets

$

5,050,000

Short-term rates are 14 percent. Long-term rates are 12 percent. Earnings before interest and taxes are $1,070,000. The tax rate is 30 percent.

What will earnings after taxes be? (Omit the "$" sign in your response.)

Earnings after taxes

$

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 two 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 $2.65 million per day in collections and $1.13 million per day in disbursements, how many dollars will the cash management system free up?(Enter your answer in dollars not in millions. Omit the "$" sign in your response.)

Freed-up funds

$

(b)

If Neon Light Company can earn 9 percent per annum on freed-up funds, how much will the income be?(Enter your answer in dollars not in millions. Omit the "$" sign in your response.)

Interest on freed-up cash

$

(c)

If the total cost of the new system is $440,000, should it be implemented?

Mervyn’s Fine Fashions has an average collection period of 50 days. The accounts receivable balance is $87,500. What is the value of its credit sales? (Use 360 days in a year. Omit the "$" sign in your response)

Credit sales

$