Chapter 17 Cash, Receivables, and Inventory Management

101) Brett's, Inc. has received a proposal from its bank to establish a lock-box system to accelerate the receipt of $600 million annually on 900,000 checks. By its own analysis Brett's, Inc.believes such a system would decrease total float by 3.5 days. If Brett's, Inc. can earn 7 percent before taxes on the released funds, what is the maximum that Brett's, Inc. should be willing to pay the bank per check for the service? Use a 365-day year.

103) Brett's, Inc. expects to have $35 million in credit sales during the coming year. In spite of a national distributing system, all remittances are sent to the home office. A proposed system can eliminate 3 days of float, releasing funds which, when invested, will earn 6.5 percent. What annual savings can Brett's, Inc. expect if the system is implemented? Use a 365-day year.

104) Jay's Lumber Supplies earns 2.5 percent on its investment in marketable securities. A draft disbursing system has been proposed that will increase disbursement float by 4 days. Purchases next year are expected to total $18 million. Individual payments average $1,000. Use a 365-day year.

a. If the draft system is adopted, what amount of funds can the firm expect to release during the year?

b. If each issue draft costs the firm $0.30, should the draft system be adopted?

c. Should the firm consider any other factors?

105) Howton Mining expects to have credit sales of $8,000,000 this year. First National Bank is offering Howton Mining a lock-box system for $1,200 per month. Howton Mining estimates that the new lock-box system will reduce float by 4.5 days. What rate of return must Howton Mining earn on its marketable securities to make it worthwhile for the company to institute this lock-box system? Use a 365-day year.

106) Crimson Plumbing Supplies expects total sales of $9,000,000 this year. Ten percent of the company's sales are paid in cash; credit sales are usually paid by check. The average check size is $3,000. Second National Bank is offering the company a lock-box system. The fees are $800 per month plus $.60 per check. Short-term marketable securities are currently earning 8 percent per year. What reduction in check collection time is necessary for Carrollton Plumbing Supplies to be neither better nor worse off from adopting the proposed system? Use a 365-day year.

107) Premium Seed Sales, Inc. expects to generate sales of $22,000,000 in the coming year. All sales are done on a credit basis, net 45 days. Premium Seed has estimated that it takes an average of three days for payments to reach their central office and an additional two days to process the payments. What is the opportunity cost of the funds tied up in the mail and processing? Premium Seed uses a 360-day year in all calculations and can invest free funds at 6.5%.

108) You have a choice between investing in a corporate bond or a municipal bond. The corporate bond has an annual yield of 10 percent, while the municipal bond has an annual yield of 7 percent. At what tax rate would you be indifferent between buying the corporate bond or the municipal bond?

109) The corporate treasurer of Wooden Furniture Inc. is considering the purchase of either a municipal obligation with a 6.1% coupon or a corporate bond with a 9.5% return. Both bonds have a $1,000 par value. The company is currently in the 35% marginal tax bracket. Which security should the treasurer recommend?

110) The selection of a proper marketable-securities mix involves evaluation of certain criteria. What are these criteria and why are they important?