Effective credit management involves establishing credit standards for extending credit to customers, determining the company’s terms of credit, and setting up procedures for invoicing and collecting past-due accounts.
The following statement refers to a credit management policy. Select the best term to complete the sentence.
The conditions of the credit sale, including cash discounts and due dates, are indicated by the company’s .
Consider the case of Newtown Co.:
Newtown Co. has a very attractive credit policy, and none of its customers pay in cash when the firm makes a sale. Newtown Co. sells to its customers on credit terms of 2/10, net 30.
If a customer bought $100,000 worth of goods and paid the firm cash eight days after the sale, how much cash would Newtown Co. get from the customer?
$90,000
$98,000
$85,000
$105,000
If the customer paid off the account after 15 days, Newtown Co. would receive .
Approximately 30% of Newtown Co.’s customers take advantage of the discount and pay on the 10th day. The remaining 70% take an average of 35 days to pay off their accounts. What is Newtown Co.’s days sales outstanding (DSO), or the average collection period?
27.5 days
26.1 days
24.8 days
28.9 days
In: Finance
In: Finance
Are there business advantages to using sustainable or green suppliers? If so, what are they? If not, do you think a traditional return on investment analysis captures all possible benefits of going green?
In: Finance
Who reports to a CFO (Chief Financial Officer)? And what do these people who report to the CFO do?
In: Finance
Problem 10-01
NPV
A project has an initial cost of $74,950, expected net cash inflows of $14,000 per year for 12 years, and a cost of capital of 11%. What is the project's NPV? (Hint: Begin by constructing a time line.) Do not round your intermediate calculations. Round your answer to the nearest cent.
In: Finance
ABC Corporation has 90-day receivables of Euro 500,000. The following information is available
Spot rate of the Euro: $ 1.20 per Euro
90-day Forward Rate: $ $1.15 per Euro
90-day Interest rates are as follows:
US Euro
90-day deposit rate 2.0 % 2.0 %
90-day borrowing rate 3.0 % 3.0 %
A call option on Euro that expires in 90-days has an exercise price of $1.20 and has a premium of $ 0.03. A put option on Euro that expires in 90-days has an exercise price of $1.20 and has a premium of $0.02
The Euro spot rate in 90-days is forecasted to be:
Possible Rate Probability
$1.15 30 %
$1.10 70 %
ABC Corporation is considering:
a) A forward hedge
b) A money market hedge
c) An option hedge and
d) Remaining un-hedged
You have been hired as a consultant to decide on the best possible hedge. Which one of the alternatives you will recommend, and why?
In: Finance
The assets of Dallas & Associates consist entirely of current assets and net plant and equipment, and the firm has no excess cash. The firm has total assets of $2.7 million and net plant and equipment equals $2.3 million. It has notes payable of $160,000, long-term debt of $746,000, and total common equity of $1.45 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.
Write out your answers completely. For example, 25 million should be entered as 25,000,000. Negative values, if any, should be indicated by a minus sign. Round your answers to the nearest dollar, if necessary.
What is the company's total debt?
$
What is the amount of total liabilities and equity that appears on the firm's balance sheet?
$
What is the balance of current assets on the firm's balance sheet?
$
What is the balance of current liabilities on the firm's balance sheet?
$
What is the amount of accounts payable and accruals on its balance sheet? (Hint: Consider this as a single line item on the firm's balance sheet.)
$
What is the firm's net working capital? If your answer is zero, enter "0".
$
What is the firm's net operating working capital?
$
What is the monetary difference between your answers to part f and g?
$
What does this difference indicate?
In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $17 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.9 million with a 0.2 probability, $3.2 million with a 0.5 probability, and $0.5 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
A British company BB Corp. enters into a 1-year interest rate swap with Sea Bank. The notional principle of the swap is £60 million. Payments will be made quarterly on the basis of 90/360 (90 days in the settlement period and 360 days per year). BB will receive a fixed rate of 3.5% and pay floating rate Euribor plus 1%. The 90-day Euribor rates are as below:
Current: 2.4% In 1 quarter: 3% In 2 quarters: 3.5% In 3 quarters: 3.7%
A. Determine the initial exchange of cash that occurs at the start of the swap.
B. Determine the quarterly payments (Q1, Q2)
C. Determine the final exchange of cash that occurs at the end of the swap.
In: Finance
Renter’s Dilemma
Adam's, Inc., a publicly traded corporation, plans to lease equipment from Jackson Co. (Jackson) on January 1, 2020, for a period of three years. Lease payments of $100,000 are due to Jackson each year. Other expenses (e.g., insurance, taxes, and maintenance) are also to be paid by Adams and amount to $2,000 per year. Jackson will not incur any initial direct costs. The lease contains no purchase or renewal options and the equipment reverts back to Jackson on the expiration of the lease. The remaining useful life of the equipment is four years. The fair value of the equipment at lease inception is $265,000. Adams has guaranteed $20,000 as the residual value at the end of the lease term. The $20,000 represents the expected value of the leased equipment to Adams at the end of the lease term. The salvage value of the equipment is expected to be $2,000 after the end of its economic life. Adam’s incremental borrowing rate is 11 percent (Jackson’s implicit rate is 10 percent and is calculable by Adams from the lease agreement).
The junior accountant of Adams analyzed the assets under lease, determined whether the lease was an operating lease or finance lease, and prepared the applicable journal entries. The senior accountant of Adams reviewed the junior accountant’s analysis and prepared a separate analysis. As the finance controller, you were given both analyses to determine the correct accounting treatment. Calculations and journal entries performed by your junior and senior accountant follow:
Present Value of the Lease Obligation
Using the rate implicit in the lease (10 percent), the present value of the guaranteed residual value would be $15,026 ($20,000 x 0.7513), and the present value of the annual payments would be $248,685 ($100,000 x 2.4869).
Using the incremental borrowing rate (11 percent), the present value of the guaranteed residual value would be $14,624 ($20,000 x 0.7312), and the present value of the annual payments would be $244,371 ($100,000 x 2.4437).
Junior accountant analysis:
Since the equipment reverts back to Jackson, it is an operating lease. 840
Entry to be posted in years 1, 2, and 3:
Dr. Rent expense $100,000
Dr. Insurance expense $2,000
Cr. Cash $102,000
(Operating lease rental paid to Jackson)
Senior accountant analysis:
Step 1 – Lease classification
The lease term is for three years. The useful life of the equipment is four years. Since the lease term is for a major part of the useful life of the equipment, it is a finance lease.
Step 2 – Computation of the lease asset and obligation
Since Adam’s incremental borrowing rate is greater than the implicit rate in the lease, compute the present value of the minimum lease payments using the 11 percent rate.
Present value of the minimum lease payments = $100,000 x 2.4437 = $244,371.
Step 3 – Allocation of payments between interest and lease obligation
Since interest has to be charged on the straight-line method, the following is the allocation of the interest and the reduction in the lease liability.
|
Year |
Cash Payment |
Interest Expense (11%) |
Reduction in Lease Obligation |
Balance of Lease Obligation |
|
0 |
$244,371 |
|||
|
1 |
$100,000 |
$26,881 |
$73,119 |
$171,252 |
|
2 |
$100,000 |
$26,881 |
$73,119 |
$98,133 |
|
3 |
$100,000 |
$26,881 |
$73,119 |
$25,014 |
Entry to be posted in year 1 for capitalization of equipment:
Db. Equipment $244,371
Cr. Lease obligation $244,371
Entry to be posted in years 1, 2, and 3 for payment:
Dr. Rent expense $2,000
Dr. Interest expense $26,881
Dr. Lease obligation $73,119
Cr. Cash $102,000
(Finance lease rental paid to Jackson)
Required:
Are either of the above analyses correct? If so, which one? If not, why not and what would need to be changed? Please provide appropriate codification support for your conclusions. ( Use answers according FASB Codifications)
In: Finance
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $14 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $5.8 million with a 0.2 probability, $3.4 million with a 0.5 probability, and $0.6 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations.
Debt/Capital ratio is 0.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 10%, interest rate is 9%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 50%, interest rate is 11%.
| RÔE = | % |
| σ = | % |
| CV = |
Debt/Capital ratio is 60%, interest rate is 14%.
| RÔE = | % |
| σ = | % |
| CV = |
In: Finance
You own a small networking startup. You have just received an offer to buy your firm from a large, publicly traded firm, JCH Systems. Under the terms of the offer, you will receive 1 million shares of JCH. JCH stock currently trades for $25.63 per share. You can sell the shares of JCH that you will receive in the market at any time. But as part of the offer, JCH also agrees that at the end of one year, it will buy the shares back from you for $25.63 per share if you desire. Suppose the current one-year risk-free rate is 5.95%, the volatility of JCH stock is 29.4%, and JCH does not pay dividends. Round all intermediate values to five decimal places as needed.
a. Is this offer worth more than $25.63 million? Explain.
b. What is the value of the offer?
In: Finance
A 15-year bond issue of 5,100,000 and bearing interest at 4% payable annually is sold to yield 4.4% compounded semi-annually. What is the issue price of the bonds?
In: Finance
FINANCIAL LEVERAGE EFFECTS The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $20 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $3.1 million with a 0.5 probability, and $0.7 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. RÔE = % σ = % CV = Debt/Capital ratio is 10%, interest rate is 9%. RÔE = % σ = % CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = % σ = % CV = Debt/Capital ratio is 60%, interest rate is 14%. RÔE = % σ = % CV =
In: Finance
In one or two paragraphs, please discuss how Fed Reserve’s interest rate policy will influence Stock and Bond markets.
In: Finance