# Fleda's Beauty Company has $200,000 of total assets and earns 20 percent interest and taxes on... ###### Question: Fleda's Beauty Company has$200,000 of total assets and earns 20 percent interest and taxes on these assets. The ratio of total debts to total assets (or DR been set at 50 percent. The interest rate on short-term debt is 7 percent, while the interest rate on long-term debt is 10 percent. A conservative policy calls for only long-term debt with no short-term debt; an intermediate policy calls for 50 percent short-term debt and 50 percent long-term debt; and an aggressive policy calls for 100 percent short-term debt and no long-term debt. The firm's tax rate is 50 percent (a) What is the rate of return on equity under each of these three policies? (b) If current assets are 50 percent of total assets, what is the current ratio unde each of these three policies?
Samuel's Field Trials, Inc. expects next year's sales to be $100,000 if the economy is strong,$70,000 if the economy is steady, and $50,000 if the economy is weak. Assume there is a 40 percent probability that the economy will be strong, a 10 percent probability of a steady economy, and a 50 percent probability of a weak economy. What is the expected level of sales for next year? 7 Camille's Jewelry Company has an average collection period of 60 days; its in- ventory conversion period is 80 days; and its average payment period is about 50 days. The company spends a total of$2 million per year at a constant rate. The firm's required rate of return on investment is 20 percent. (a) What is Camille's cash conversion cycle? (b) What is Camille's cash turnover or (360/cash-cycle)? (c) Calculate the minimum amount of cash that the company must main- tain to meet its payments as they come due. (Hint: Total Spending + Cash Turnover.) (d) How much can Camille's Jewelry Company save (assuming a 20 percent required rate of return) if it stretches its accounts payable to 68 days?
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95 The Ethel Company purchases 40,000 boxes of ice cream cones over each 200-dav period of business. Carrying costs are $2 per box and ordering costs are$100 per order. The company desires to maintain a safety stock of 500 boxes (on hand initially) and two days are required for delivery. (a) What is the economic order quantity? (b) What is the optimal number of orders to be placed? (c) What is the total inventory cost associated with the economic order quan-tity? (d) What is the reorder point? (e) The company can obtain a quantity discount of $0.02 per box if it in- creases its order size to 3,000 boxes. Should The Ethel Company increase its order size to take the cash discount offered? NUDLEIVIS 8-1 For each of the following purchases, (a) calculate the effective intera failing to take the discount, and (b) determine the date and amount paid discount is taken. Assume that the invoice date is March 10 and that the 30 days in a month (1)$500, 2/10/net 30 (2) $3,500, 4/20/net 60 8-2 There are three alternatives to increase net working capital by$10,000.(Assume each financing alternative is for a full year.) (1) Forego cash discounts with the terms of 2/10/net 40. (2) Borrow the money at 7 percent from the bank on a regular basis. This bank loan requires a minimum compensating balance of 20 percent. (3) Sell commercial paper at 8 percent. The underwriting fees of the issue are 2 percent of the face value. Calculate the effective annual interest rate of each alternative.
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8-9 Mike can borrow $50,000 at 10 percent interest from a local bank. What is the effective rate of interest under the following conditions? (a) The principal and interest are to be repaid at the end of one year, but there is a 20 percent compensating balance requirement. (b) The loan is discounted and the principal is repaid at the end of one year. (c) The loan principal and interest are to be paid back at the end of a year. 8-10 Springer Company finds that it will need another$50,000 in August to build up inventory. Benchmark Community Bank has offered to make a loan at 10 percent annually, provided the company maintains a 20 percent compensating balance. Citizens Bank and Trust, a competing bank, indicated that it will lend the company $50,000 for 13 percent with no compensating balance. Both loans are for a year. Which bank is making the better offer? 9-5 9-6 How long does it take$1 to triple if money grows at 6 percent compounded annually, semiannually, quarterly, monthly, and daily? The present value of a five-year annuity is $20,000. What is each quarterly pay- ment if the annual interest rate is 8 percent compounded quarterly? A four-year note has a payment of$3,000 at the end of each year for four years. What is the effective interest rate on the loan if the present principal of the note is $10,1612 9-7 9-19 Calvin Carter wants to buy a new Z71 Chevrolet Pickup Truck from the local dealer. The price of the truck is$31,000 and he can get a 5 year (60 month) loan at 5 percent interest to pay for the truck. Compute his monthly payment and the total amount he will pay (principal + interest) for the truck for the entire 60 months.
9-9 every six months for s appropriate yield to 9-10 9-11 9-12 A 20-year bond promises to pay $60 interest at the end of every six mon$120 per year). The bond has a par value of $1,000 and its appropria maturity is 10 percent. What is the present value of the bond? A project is expected to earn$200, $300, and$400 for the next three y is the present value of these cash flows at a 10 percent discount rate? Exactly 15 years from now Mr. J. R. Smith will start receiving a pension of son per year. The pension payments will continue for 10 years after retirement much is the pension worth now if money is worth 10 percent per year? If you decide to buy a house, you have to make a loan payment of $10,000 year for nine years. What is the present principal of this loan? Assume that the interest rate is 10 percent. J. R. Smith plans to borrow$200,000 through a 30-year mortgage from his bark to buy a home. If the bank charges him an interest rate of 7 percent, find the (a) Monthly mortgage payment (b) Amortization schedule for the first 3 months: balance after each paymer principal and interest portions of each payment. (C) For the first 221 payments, what is the total interest paid an principal. (d) How much would J. R. increase his monthly payment if her period to 15 years, all other things constant? How much in total principal and interest? 9-13 payment if he reduced the lor 10w much would J. R samt
mount of money 9-15 ow and continue until today. If the Paul Liles is 50 years old and he decides to set aside a fixed amount of every year in a pension plan. He wants to start the plan now and conti he is 65 years of age (or 15 years). The money accumulated must allow to receive $3,000 per month, starting one month after his 65th birthday continuing for 20 years to age 85. If the money is invested at 10 percent how much does Mr. Liles need to set aside each month to meet his goal? Assume 10 percent discount rate for entire period. 9-16 A corporate bond with a face or par value of$1,000 has a 10 percent coupon rate and will mature in 10 years. If the current market rate is 8 percent, what is the current value of the bond (assume annual interest payments)? Charles Featherstun purchased 100 acres of land for $2,500 in 1950. If he sells the land for$200,000 in 2002 (or 52 years later), what rate of return will he have earned on his investment? 9-17

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