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I need solutions to connect exam 3 for Busi 320 corporate finance.

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- Submitted On 25 Jun, 2017 07:48:32

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1.
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:
March 3,150
April 7,150
May 11,300
June 9,300
________________________________________
30,900
________________________________________________________________________________
________________________________________
If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup.
The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 30,900 units over four months at a level of 7,725 per month.
a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total. (Leave no cells blank - be certain to enter "0" wherever required.)
Ending
Inventory
March units
April units
May units
June units
________________________________________
b. If the inventory costs $16 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 1.0 percent as the monthly rate.) (Leave no cells blank - be certain to enter "0" wherever required.)
Inventory
Financing Cost
March $
April
May
June
________________________________________
Total financing cost $
Explanation:
a.
Bambino Sporting Goods
Units
Sold Units
Produced Change in
Inventory Ending Inventory Units
March 3,150 7,725 4,575 4,575
April 7,150 7,725 575 5,150
May 11,300 7,725 –3,575 1,575
June 9,300 7,725 –1,575 0
________________________________________
b.
Bambino Sporting Goods
Ending
Inventory
Units Total Cost
($16 per unit) Inventory Financing
Cost
(at 1.0% per month)
March 4,575 $73,200 $ 732
April 5,150 82,400 824
May 1,575 25,200 252
June 0 0 0
________________________________________ ________________________________________ ________________________________________
Total financing cost = $ 1,808
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________
2.
Biochemical Corp. requires $620,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. Assume interest is paid in full at the end of each year.
a. Determine the total interest cost under each plan.
Interest Cost
Long-term fixed-rate $
Short-term variable-rate $
________________________________________
b. Which plan is less costly?
Short-term variable-rate plan
Long-term fixed-rate plan
Explanation:
a.
Long-term fixed-rate interest cost = 3 × (.1160 × $620,000) = $215,760
Short-term variable-rate interest cost:
Year 1 interest = .0825 × $620,000 = $51,150
Year 2 interest = .1275 × $620,000 = $79,050
Year 3 interest = .0950 × $620,000 = $58,900
Total interest = $51,150 + 79,050 + 58,900 = $189,100
b.
The short-term variable-rate financing plan has the lower cost.
3.
Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $210,000. The company can borrow $210,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. Assume interest is paid in full at the end of each year.
a. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent three-year loan.
Interest
9 percent loan $
11 percent loan $
Interest savings $
________________________________________
b. What if interest rates on the 9 percent loan go up to 14 percent in year 2 and 17 percent in year 3? What would be the total interest cost compared to the 11 percent, three-year loan?
Interest
Fixed-rate 11% loan $
Variable-rate loan $
Additional interest cost $
________________________________________
Explanation:
a.
9% fixed-rate interest cost = 3 × (.09 × $210,000) = $56,700
11% fixed-rate interest cost = 3 × (.11 × $210,000) = $69,300
Interest savings = $69,300 − 56,700 = $12,600
b.
11% fixed-rate interest cost = 3 × (.11 × $210,000) = $69,300.
Short-term variable-rate interest cost:
Year 1 interest = .09 × $210,000 = $18,900
Year 2 interest = .14 × $210,000 = $29,400
Year 3 interest = .17 × $210,000 = $35,700
Total interest = $18,900 + 29,400 + 35,700 = $84,000
Additional interest cost = $84,000 − 69,300 = $14,700
4.
Assume that Hogan Surgical Instruments Co. has $3,900,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 17 percent, but with a high-liquidity plan, the return will be 13 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,900,000 will be 9 percent, and with a long-term financing plan, the financing costs on the $3,900,000 will be 11 percent.
a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.
Anticipated return $
b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.
Anticipated return $
c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.
Anticipated Return
Low liquidity $
High liquidity $
________________________________________
Explanation:
a.
Most aggressive:
Low liquidity return $ 3,900,000 × .17 = $ 663,000
Short-term financing cost 3,900,000 × .09 = – 351,000
________________________________________ ________________________________________
Anticipated return $ 312,000
________________________________________________________________________________ ________________________________________________________________________________
________________________________________
b.
Most conservative:
High liquidity return $ 3,900,000 × .13 = $ 507,000
Long-term financing cost 3,900,000 × .11 = – 429,000
________________________________________ ________________________________________
Anticipated return $ 78,000
________________________________________________________________________________ ________________________________________________________________________________
________________________________________
c.
Moderate approach:
Low liquidity return $ 3,900,000 × .17 = $ 663,000
Long-term financing cost 3,900,000 × .11 = – 429,000
________________________________________ ________________________________________
$ 234,000
________________________________________________________________________________ ________________________________________________________________________________
High liquidity return $ 3,900,000 × .13 = $ 507,000
Short-term financing cost 3,900,000 × .09 = – 351,000
________________________________________ ________________________________________
$ 156,000
5.
Assume that Atlas Sporting Goods Inc. has $950,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 12 percent, but with a high-liquidity plan the return will be 9 percent. If the firm goes with a short-term financing plan, the financing costs on the $950,000 will be 6 percent, and with a long-term financing plan, the financing costs on the $950,000 will be 8 percent.
a. Compute the anticipated return after financing costs with the most aggressive asset-financing mix.
Anticipated return $
b. Compute the anticipated return after financing costs with the most conservative asset-financing mix.
Anticipated return $
c. Compute the anticipated return after financing costs with the two moderate approaches to the asset-financing mix.
Anticipated Return
Low liquidity $
High liquidity $
________________________________________
d. If the firm used the most aggressive asset-financing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places.)
Earnings per share $
e-1. Now assume the most conservative asset-financing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places.)
Earnings per share $
e-2. Would the conservative mix have higher or lower earnings per share than the aggressive mix?
Higher
Lower
Explanation:
a.
Most aggressive:
Low liquidity return $950,000 × .12 = $114,000
Short-term financing cost 950,000 × .06 = –57,000
________________________________________
Anticipated return 57,000
________________________________________________________________________________
________________________________________
b.
Most conservative:
High liquidity return $950,000 × .09 = $85,500
Long-term financing cost 950,000 × .08 = –76,000
________________________________________
Anticipated return 9,500
________________________________________________________________________________
________________________________________
c.
Moderate approach:
Low liquidity return $950,000 × .12 = $114,000
Long-term financing cost 950,000 × .08 = –76,000
________________________________________
Anticipated return $38,000
________________________________________________________________________________
High liquidity return $950,000 × .09 = $85,500
Short-term financing cost 950,000 × .06 = –57,000
________________________________________
Anticipated return $28,500
________________________________________________________________________________
________________________________________
d.
Anticipated return $57,000
Taxes (30%) 17,100
________________________________________
Earnings after taxes $39,900
________________________________________________________________________________
Shares 20,000
Earnings per share $2.00
________________________________________
e-1.
Anticipated return $9,500
Taxes (30%) 2,850
________________________________________
Earnings after taxes $6,650
________________________________________________________________________________
Shares 5,000
Earnings per share $1.33
________________________________________
e-2.
The more conservative financing mix has lower earnings per share
6.
Colter Steel has $5,200,000 in assets.
Temporary current assets $ 2,400,000
Permanent current assets 1,570,000
Fixed assets 1,230,000
________________________________________ ________________________________________
Total assets $ 5,200,000
________________________________________________________________________________ ________________________________________________________________________________
________________________________________
Short-term rates...

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Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January $ 10,300 April $ 10,300
February 4,300 May 11,300
March 5,300 June 6,300
________________________________________
Short-term financing will be utilized for the next six months. Projected annual interest rates are:
January 7.0 % April 14.0 %
February 8.0 % May 12.0 %
March 11.0 % June 12.0 %
________________________________________
a. Compute total dollar interest payments for the six months. (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)
Total dollar interest payments $
b-1. Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Round your monthly interest rate to 2 decimal places when expressed as a percent. Round your interest payments to the nearest whole cent.)
Total dollar interest payments $
b-2. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller than with the short-term financing plan?
Smaller
Larger
Explanation:
a.
Carmen’s Beauty Salon
Short-term financing
Month Rate Monthly Rate Amount Financed Monthly
Interest
January 7 % .58 % $ 10,300 $ 59.74
February 8 .67 4,300 28.81
March 11 .92 5,300 48.76
April 14 1.17 10,300 120.51
May 12 1.00 11,300 113.00
June 12 1.00 6,300 63.00
________________________________________ ________________________________________
$ 433.82
________________________________________________________________________________ ________________________________________________________________________________
________________________________________
b-1.
Carmen’s Beauty Salon
Long-term financing
Month Rate Monthly Rate Amount Financed Monthly
Interest
January 12 % 1 % $ 10,300 $ 103.00
February 12 1 4,300 43.00
March 12 1 5,300 53.00
April 12 1 10,300 103.00
May 12 1 11,300 113.00
June 12 1 6,300 63.00
________________________________________ ________________________________________
$ 478.00
________________________________________________________________________________ ________________________________________________________________________________
________________________________________
b-2.
Total dollar interest payments would be larger under the long-term financing plan.
11.
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January $ 9,900 April $ 9,900
February 3,900 May 10,900
March 4,900 June 5,900
________________________________________
Short-term financing will be utilized for the next six months. Projected annual interest rates are:
January 8 % April 15 %
February 9 May 12
March 12 June 12
________________________________________
What long-term interest rate would represent a break-even point between using short-term financing and long-term financing? (Round the monthly interest rate to 2 decimal places when expressed as a percent (e.g., .67%) and use this rounded rate to compute the monthly interest. Round the monthly interest to the nearest whole cent. Use the rounded monthly interest amounts to compute the total interest for the 6-month period. Input your answer as a percent rounded to 2 decimal places.)
Interest rate %
Explanation:
Carmen’s Beauty Salon
Short-term Financing
Month Annual Rate Monthly Rate Amount Financed Monthly Interest
January 8 % .67 % $ 9,900 $ 66.33
February 9 .75 3,900 29.25
March 12 1.00 4,900 49.00
April 15 1.25 9,900 123.75
May 12 1.00 10,900 109.00
June 12 1.00 5,900 59.00
________________________________________ ________________________________________ ________________________________________ ________________________________________
$ 45,400 $ 436.33
___________________________________________________________________________...

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