COST OF TRADE CREDIT AND BANK LOAN

Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 30; and it currently pays on the 5^th day and takes discounts. Lancaster plans to expand, which will require additional financing. Assume 365 days in year for your calculations.

1. If Lancaster decides to forgo discounts, how much additional credit could it obtain? Write out your answer completely. For example, 5 million should be entered as 5,000,000. Round your answer to the nearest cent.
   $______?
2. 
   
3. What would be the nominal cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   =______ %
4. 
   
5. What would be the effective cost of that credit? Do not round intermediate calculations. Round your answer to two decimal places.
   =_______%
6. 
   
7. If the company could get the funds from a bank at a rate of 12%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Do not round intermediate calculations. Round your answer to two decimal places.
   =_______ %
8. Should Lancaster use bank debt or additional trade credit?
   =Bank debt OR Additional trade credit ?

What is the outlook for interest rates in Canada? Some possible questions you may wish to explore include: o Impact of recent rate hikes on the Canadian economy? Housing market? o Expectations for the interest rate over the next year
o Interest rate o Housing market o Unemployment rate o Economic projections

You are evaluating a project for The Tiff-any golf club, guaranteed to correct that nasty slice. You estimate the sales price of The Tiff-any to be $410 per unit and sales volume to be 1,200 units in year 1; 1,325 units in year 2; and 1,000 units in year 3. The project has a 3-year life. Variable costs amount to $230 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $162,000 in assets, which will be depreciated straight-line to zero over the 3-year project life. The actual market value of these assets at the end of year 3 is expected to be $34,000. NWC requirements at the beginning of each year will be approximately 30 percent of the projected sales during the coming year. The tax rate is 30 percent and the required return on the project is 12 percent.

What is the operating cash flow for the project in year 2?

Using Mean-Variance analysis, how do you suggest an alternative portfolio (either a portfolio with the same mean but lower risk or a portfolio with same risk but a higher mean.). What Excel formulas do you use to do this?

Prepare a short discussion of each calculated ratio, which you believe may be unsatisfactory, and explain why.

1. There are many risks on the way to achieving financial independence. One such factor that affects retirement planning is a shortened work life expectancy due to untimely death, disability, health and/or unemployment. Which of the following is NOT a recommended way to mitigate this risk?

a. Obtaining insurance

b. Education

c. Training

d. Adequate capital accumulation

2. True or False: Two of the more important factors affecting retirement planning are the savings amount and the growth of GDP.

a. True

b. False

23. As an active equity manager you must deliver competitive relative performance on a consistent basis in order to attract and keep clients. In order to deliver that performance, you must structure your portfolio and make decisions to take advantage of several factors. What are those factors and why are they important?

22. If I were to provide you with five years of monthly returns for a particular mutual fund (60 return observations), how would you go about identifying the style of that mutual fund?

You are valuing Soda City Inc. It has $139 million of debt, $74 million of cash, and 189 million shares outstanding. You estimate its cost of capital is 9.1%. You forecast that it will generate revenues of $731 million and $769 million over the next two years. Projected operating profit margin is 36%, tax rate is 22%, reinvestment rate is 51%, and terminal exit value multiple at the end of year 2 is 10. What is your estimate of its share price? Round to one decimal place. ​[Hint: Compute projected FCFF for years 1 and 2 based on info provided, compute terminal value using the exit multiple method, discount it all to find EV, walk the bridge to Equity, divide by number of shares outstanding.]

Give your experience with managers in the past, what problems do you see for managers who let employees decide for themselves the best way to do things and give them the power to obtain needed equipment?

47.         (BONUS) Suppose that Disney wants to follow up on the success of Frozen, with a sequeal this fall. The movie will cost $165 million to produce (INVESTED TODAY), and the producers expect the movie to generate a cash flow of $160 million in the first year. After the first year, cash flows will decline to $15 million in year 2.

However, the movie will also create synergy within the company.

Disney will build a new Olaf ride at Epcot for $40 million (invested TODAY). Disney suspects that the ride will bring visitors to the park and increase merchandise sales. Disney estimates that sales will increase by $12 million per year in PERPETUITY. The after-tax operating margin on these sales is 50% for Disney. If the cost of capital is 10%, what is the combined NPV of this opportunity?