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1. Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm’s new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks’ average. If this were done, by how much would inventories decline? Use a 365day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85.88 Benchmark inventory conversion period (ICP) = 38.00 (Points : 10) $ 7,316 $ 8,129 $ 9,032 $10,036 $11,151 Question 2. 2. Data on Mertz Co., for the most recent year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm’s new CFO believes that the company could delay payments enough to

increase its PDP to the benchmarks’ average. If this were done, by how much would payables increase? Use a 365day year. Cost of goods sold = $75,000 Payables = $5,000 Payables deferral period (PDP) = 24.33 Benchmark payables deferral period = 30.00 (Points : 10) $ 764 $ 849 $ 943 $1,048 $1,164 Question 3. 3. Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm’s cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $30,000 Inventory = $4,500 Accounts receivable = $1,800 Accounts payable = $2,500 (Points : 10) 28 Days 32 Days 35 Days 39 Days 43 Days Question 4. 4. Howes Inc. purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.) (Points : 10) 20.11% 21.17% 22.28% 23.45% 24.63% Question 5. 5. Noddings Inc.’s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm’s owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.) (Points : 10) 10.59% 11.15% 11.74% 12.36% 13.01%

Question 6. 6. In 1985, a given Japanese imported automobile sold for 1,476,000 yen, or $8,200. If the car still sold for the same amount of yen today but the current exchange rate is 144 yen per dollar, what would the car be selling for today in U.S. dollars? (Points : 10) $5.964 $8,200 $10,250 $12,628 $13,525 Question 7. 7. Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market? (Points : 10) 1 U.S. dollar = 0.6235 Canadian dollars 1 U.S. dollar = 0.6265 Canadian dollars 1 U.S. dollar = 1.0000 Canadian dollars 1 U.S. dollar = 1.5961 Canadian dollars 1 U.S. dollar = 1.6039 Canadian dollars Question 8. 8. Suppose one year ago, Stackpool inc. had inventory in Britain valued at 240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2 U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S. dollars. The inventory in Britain is still valued at 240,000 pounds. What is the gain or loss in inventory value in U.S. dollars as a result of the change in exchange rates? (Points : 10) -$240,000 -$43,200 $0 $43,200 $47,473 Question 9. 9. In its negotiations with its investment bankers, Patton Electronics has reached an agreement whereby the investment bankers receive a smaller fee now (6% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 200,000 shares at $5.00 per share. Patton will go public by selling $5,000,000 of new common stock. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker’s required return on such arrangements is 15%, and ignore taxes. (Points : 10) $1,235,925 $1,300,973 $1,369,446 $1,441,522 $1,517,391 Question 10. 10. The company you just started has been offered credit terms of 4/30, net 90 days. What will be the nominal annual

percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.) (Points : 10) 16.05% 16.90% 17.74% 18.63% 19.56% 11. Whitson Co. has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm’s cost of goods sold is 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company’s cash conversion cycle? Round to the nearest whole day. (Points : 20) Question 12. 12. Taylor Textbooks, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit – free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.) (Points : 20) Net purchases = $450,000 per year Net purchases = $450,000 / 365 = $1,232.88 per day Free trade credit = 15($1,232.88) = $18,493.20 Total credit = 50($1,232.88) = $61,644 Costly trade credit = Total credit – Free trade credit = $61,644 – 18,493.20 = $43,150.80 Question 13. 13. Stanley Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment. (Points : 20) Question 14. 14. Waldrop Corporation is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm’s tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.) (Points : 20) Question 15. 15. 10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but

flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant. (Points : 20)

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