P.1. Pretty Lady Cosmetic Products has an average production process time of 40 days. Finished goods are kept on hand for an average of 15 days before they are sold. Accounts receivable are outstanding an average of 35 days, and the firm receives 40-days credit on its purchases from suppliers.
a. Estimate the average length of the firm’s short-term operating cycle. How often would the cycle turn over in a year?
Operating cycle= Inventory period + Receivable period
= (40 days + 15 days) + 35 days = 90 days
# turns per year= 365/90 = 4.06 times
b. Assume net sales of $1,200,000 and cost of goods sold of $900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?
Inventory period= Inventory/(COGS/365)
55 = Inventory/(900,000/365) ® Inventory = ?
Receivables period = AR/(Sales/365)
35 = AR/($1,200,000/365) ® AR = $?
Payment period= AP/(COGS/365)
40 = AP/($900,000/365) ® AP = $?
Net financing = AR + Inventory – AP
= $115,068.49 + $135,616.44 – $?
= $152,054.79
Ch16
3. Obtain a current issue of the Federal Reserve Bulletin, or review of copy from the Fed’s Web site (www.federalreserve.gov) or the St. Louis Fed’s Web site(www.stlouisfed.org), and determine the changes in the prime rate that have occurred since the end of 1998. Comment on any trends in the data.
Library assignment
P4
4.Compute the effective cost of not taking the cash discount under the following trade credit terms:
a. 2/10 net 40
2 365
× = ?%
100 – 2 40 – 10
b. 2/10 net 50
2 365
× = ?%
100 – 2 50 – 10
c. 3/10 net 50
3 365
× = ?%
100 – 3 50 – 10
d. 2/20 net 40
2 365
× = ?%
100 – 240 – 20
PROBLEMS and answers Chapter17:
1. Find the NPV and PI of a project that costs $1,500 and returns $800 in Year 1 and $850 in Year 2. Assume the project’s cost of capital is 8 percent.
PV of cash inflows = $800/1.08 + $850/(1.08)2 = $?
PV of cash outflows = $?
NPV = $1469.48 – 1,500 = $–30.52
PI = $1,469.48/1,500 = ?
7. AA Auto Parts Company has a corporate tax rate of 34 percent and depreciation of $19,180. Compute its depreciation tax shield.
$19,180 x ? = $?
Chapter 18
8.The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long-term debt and 60 percent common equity. The before-tax cost of debt is estimated to be 10 percent and the company is in the 40 percent tax bracket. The current risk-free interest rate is 8 percent on Treasury bills. The expected return on the market is 13 percent and the firm’s stock beta is 1.8
a.What is Nutrex’s cost of debt?
kd = YTM (1 – T) = 10%(1 – .4) = ?%
b.Estimate Nutrex’s expected return on common equity using the security market line.
kre = RFR + beta (RMKT – RFR) = 8% + 1.8(13% – 8%) = ?%
c.Calculate the after-tax weighted average cost of capital.
WACC = .4(6%) + .6(17%) = ?%
capital structure.
