Part -1:
Question 1:
Snider Industries sells on terms of 2/10, net 45. Total sales for the year are $1,500,000. Thirty percent of customers pay on the 10th day and take discounts; the other 70% pay, on average, 50 days after their purchases.
a. What is the days sales outstanding?
b. What is the average amount of receivables?
c. What would happen to average receivables if Snider toughened its collection policy with the result that all nondiscount customers paid on the 45th day?
Question 2:
Effective Cost of Trade Credit
The D.J. Masson Corporation needs to raise $500,000 for 1 year to supply workingit world capital to a new store. Masson buys from its suppliers on terms of 3/10, net 90, an t currently pays on the 10th day and takes discounts. However, it could forgo the discounts, pay on the 90th day, and thereby obtain the needed $500,000 in the form of costly trade credit. What is the effective annual interest rate of this trade credit?
Question 3:
Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently runs out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,000 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $400, but Koehl has agreed to maintain an average bank balance of $6,000-this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $140,000.
|
|
Sales
|
Purchases
|
|
December
|
$160,000
|
$40,000
|
|
January
|
40,000
|
40,000
|
|
February
|
60,000
|
40,000
|
a. Prepare a cash budget for December, January, and February.
b. Suppose that Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
Question 4:
Bank Financing
The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days purchases. The company's treasurer is seeking to increase bank burrowing in order to become current in meeting its trade obligations (that is, to have 30 days' payables outstanding). The company's balance sheet is as follows (in thousands of dollars):
| Cash |
$100 |
Accounts payable |
$600 |
| Accounts receivable |
300 |
Bank loans |
700 |
| Inventory |
1,400 |
Accruals |
200 |
| Current assets |
$1,800 |
Current liabilities |
$1,500 |
| Land and buildings |
600 |
Mortgage on real estate |
700 |
| Equipment |
600 |
Common stock, $0.10 par |
300 |
|
|
Retained earnings |
500 |
| Total assets |
$3,000 |
Total liabilities and equity |
$3,000 |
a. How much bank financing is needed to eliminate the past-due accounts payable?
b. Assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.)
c. Now ignore Part b and assume that the bank will lend the firm the amount calculated in Part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments.
(1) What is the total loan amount?
(2) What are the monthly installments?
(3) What is the APR of the loan?
(4) What is the effective rate of the loan?
d. Would you, as a bank loan Officer, make this loan? Why or why not?
Part -2:
Question 1:
(1) Define each of the following terms:
a. Multinational corporation
b. Exchange rate; fixed exchange rate system; floating exchange rate
c. Trade deficit; devaluation; revaluation
d. Exchange rate risk; convertible currency; pegged exchange rate
e. Interest rate parity; purchasing power parity
f. Spot rate; forward exchange rate; discount on forward rate; premium on forward rate
g. Repatriation of earnings; political risk
h. Eurodollar; Eurobond; international bond; foreign bond
i. The euro
(2) Why do U.S. corporations build manufacturing plants abroad when they could build them at home?
(3) Should firms require higher rates of return on foreign projects than on identical projects located at home? Explain.
(4) What is a Eurodollar? If a French citizen deposits $10,000 in Chase Bank in New York, have Eurodollars been created? What if the deposit is made in Barclays Bank in London? Chase's Paris branch? Does the existence of the Eurodollar market make the Federal Reserve's job of controlling U.S. interest rates easier or more difficult? Explain.
Question 2:
At today's' spot exchange rates I U.S. dollar can be exchanged for 9 Mexican pesos or for 111.23 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross rate between the yen and the peso; that is, how many yen would you receive for every peso exchanged?
Question 3:
Suppose the exchange rate between U.S. dollars and the Swiss franc is SFr1.6 = $1 and the exchange rate between the dollar and the British pound is £1 = $1.50. What then is the cross rate between francs and pounds?
Question 4:
Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen equals 0.0086 dollar. In Japan, 90-day risk-free securities yield 4.6%. What is the yield on 90-day risk-free securities in the United States?
Question 5:
In the spot market, 7.8 pesos can be exchanged for 1 U.S. dollar. A pair of headphones costs $15 in the United States. If purchasing power parity holds, what should be theprice of the same headphones in Mexico?
Question 6:
Foreign Capital Budgeting
The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether to invest in a 2-year project in the United States. The project's expected dollar cash flows consist of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in Year 2. The risk-adjusted cost of capital for this project is 13%. The current exchange rate is 1,050 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:
1-year 2-year
U.S. 4.0% 4.25%
S. Korea 3.0% 3.25%
a. If this project were instead undertaken by a similar U.S.-based company with the same risk-adjusted cost of capital, what would be the net present value and rate of return generated by this project?
b. What is the expected forward exchange rate 1 year from now and 2 years from now? (Hint: Take the perspective of the Korean company when identifying home and foreign currencies and direct quotes of exchange rates.)
c. If Nam Sung undertakes the project, what is the net present value and rate of return of the project for Nam Sung?