busi320_corporate_finance2013_fallb_moten_assignment_3_problems x
1.Problem 62 Expected value [LO6]
Sharpe Knife Company expects sales next year to be $1,540,000 if the economy is strong, $820,000 if the economy is steady, and $540,000 if the economy is weak. Mr. Sharpe believes there is a 25 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 15 percent probability of a weak economy. 
What is the expected level of sales for the next year? (Omit the “$” sign in your response.) 
Expected level of sales 
$ 
[removed] 
2.Problem 64 External financing [LO1]
Antivirus, Inc., expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $590,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 percent dividend payout. 
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the “$” sign in your response.) 
External funds needed 
$ [removed] 
3.Problem 66 Level versus seasonal production [LO1]
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: 
March 
3,200 

April 
7,200 

May 
11,400 

June 
9,400 

31,200 
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 above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,200 units over four months at a level of 7,800 per month. 
(a) 
What is the ending inventory at the end of each month? (Leave no cells blank – be certain to enter “0” wherever required.) 
March[removed] April[removed] May[removed] June[removed]
Ending inventory 
(b) 
If the inventory costs $17 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) 
March$ [removed]
April
May[removed] June[removed]
$ [removed]
Inventory financing cost 
[removed] 
Total financing cost 
rev: 01_07_2013
4.Problem 68 Shortterm versus longerterm borrowing [LO3]
Biochemical Corp. requires $530,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes shortterm financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. 
(a)
Determine the total interest cost under each plan. (Omit the “$” sign in your response.) 
Interest cost 
Fixed cost financing 
Variable shortterm financing 
(b)
Which plan is less costly? 
5.Problem 69 Shortterm versus longerterm borrowing [LO3]
Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $410,000. The company can borrow $410,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. 
(a)
How much would the firm save in interest over the threeyear life of the computer system if the oneyear loan is utilized, and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent threeyear loan. (Omit the “$” sign in your response.) 
Amount 

9 Percent 

11 Percent 

Interest saving 
(b)
What if interest rates on the 9 percent loan go up to 14 percent in the second year and 17 percent in the third year? What would be the total interest cost compared to the 11 percent, threeyear loan? (Omit the “$” sign in your response.) 
Amount
1st year 
2nd year 
3rd year 
Extra interest cost 
6.Problem 610 Optimal policy mix [LO5]
Assume that Hogan Surgical Instruments Co. has $3,200,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 15 percent, but with a highliquidity plan, the return will be 11 percent. If the firm goes with a shortterm financing plan, the financing costs on the $3,200,000 will be 7 percent, and with a longterm financing plan, the financing costs on the $3,200,000 will be 9 percent. 
Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return
(c) 
Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) 
Low liquidity 

High liquidity 
7.Problem 611 Optimal policy mix [LO5]
Assume that Atlas Sporting Goods, Inc., has $990,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 16 percent, but with a highliquidity plan the return will be 13 percent. If the firm goes with a shortterm financing plan, the financing costs on the $990,000 will be 10 percent, and with a longterm financing plan, the financing costs on the $990,000 will be 12 percent. 
(a)Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) Anticipated return (b)Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) Anticipated return (c)Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) Anticipated return Low liquidity High liquidity
(d) 
If the firm used the most aggressive assetfinancing 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. Omit the “$” sign in your response.) 
Earnings per share 
(e1) 
Now assume the most conservative assetfinancing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) 
Earnings per share
(e2) 
Would it be higher or lower than the earnings per share computed for the most aggressive plan computed in part d? 
8. Problem 612 Matching asset mix and financing plans [LO3] Winfrey Diet Food Corp. has $4,550,000 in assets. Temporary current assets$1,100,000 Permanent current assets 1,505,000 Fixed assets 1,945,000 Total assets$4,550,000 Shortterm rates are 7 percent. Longterm rates are 12 percent. Earnings before interest and taxes are $970,000. The tax rate is 20 percent. If longterm financing is perfectly matched (synchronized) with longterm asset needs, and the same is true of shortterm financing, what will earnings after taxes be? (Omit the “$” sign in your response.) Earnings after taxes$ [removed]

BUSI320 Corporate Finance2013 FallB (Moten)
Assignment:
Homework 3
1.Problem
6
2 Expected value [LO6]
Sharpe Knife Company expects sales next year to be
$ 1,540,000 if the economy is strong, $820,000 if the economy is steady, and $540,000 if the economy is weak. Mr. Sharpe believes there is a 25 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 15 percent probability of a weak economy. 
What is the expected level of sales for the next year? (Omit the “$” sign in your response.) 
Expected level of sales
$
2.Problem 64 External financing [LO1]
Antivirus, Inc., expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $5 9 0,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 percent dividend payout. 
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the “$” sign in your response.) 
External funds needed 
$

3.Problem 66 Level versus seasonal production [LO1]
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: 
March 
3,200 

April 
7,200 

May 
11,400 

June 
9,400 

31,200 

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 above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,200 units over four months at a level of 7,800 per month.
(a) 
What is the ending inventory at the end of each month? (Leave no cells blank – be certain to enter “0” wherever required.) 
March
April
Ending 

(b) 
If the inventory costs $17 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) 
March
$
April
May
June
$
Inventory 
Total financing cost 
rev: 01_07_2013
4.Problem 68 Shortterm versus longerterm borrowing [LO3]
Biochemical Corp. requires $530,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes shortterm financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. 
(a)
Determine the total interest cost under each plan. (Omit the “$” sign in your response.) 
Interest cost 
Fixed cost financing 
Variable shortterm financing 
(b)
Which plan is less costly? 
5.Problem 69 Shortterm versus longerterm borrowing [LO3]
Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $4 10 ,000. The company can borrow $410,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. 
(a)
How much would the firm save in interest over the threeyear life of the computer system if the oneyear loan is utilized, and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent threeyear loan. (Omit the “$” sign in your response.) 
Amount 

9 Percent 

11 Percent 

Interest saving 
(b)
What if interest rates on the 9 percent loan go up to 14 percent in the second year and 17 percent in the third year? What would be the total interest cost compared to the 11 percent, threeyear loan? (Omit the “$” sign in your response.) 
Amount
1st year 
2nd year 
3rd year 
Extra interest cost 
6.Problem 610 Optimal policy mix [LO5]
Assume that Hogan Surgical Instruments Co. has $3,200,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 15 percent, but with a highliquidity plan, the return will be 11 percent. If the firm goes with a shortterm financing plan, the financing costs on the $3,200,000 will be 7 percent, and with a longterm financing plan, the financing costs on the $3,200,000 will be 9 percent. 
Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return
(c) 
Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) 
Anticipated return  
Low liquidity 

High liquidity 
7.Problem 611 Optimal policy mix [LO5]
Assume that Atlas Sporting Goods, Inc., has $990,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 16 percent, but with a highliquidity plan the return will be 13 percent. If the firm goes with a shortterm financing plan, the financing costs on the $990,000 will be 10 percent, and with a longterm financing plan, the financing costs on the $990,000 will be 12 percent. 
(a)
Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.)
Anticipated return
(b)
Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.)
Anticipated return
(c)
Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.)
Low liquidity
High liquidity
Anticipated 
(d) 
If the firm used the most aggressive assetfinancing 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. Omit the “$” sign in your response.) 
Earnings per share 
(e1) 
No w assume the most conservative assetfinancing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) 
Earnings per share
8. Problem 612 Matching asset mix and financing plans [LO3]
Winfrey Diet Food Corp. has $4,550,000 in assets.
1,
100,000
1,505,000
1,945,000
$
4,550,000
Shortterm rates are 7 percent. Longterm rates are 12 percent. Earnings before interest and taxes are $970,000. The tax rate is 20 percent.
If longterm financing is perfectly matched (synchronized) with longterm asset needs, and the same is true of shortterm financing, what will earnings after taxes be? (Omit the “$” sign in your response.)
(e2) 
Would it be higher or lower than the earnings per share computed for the most aggressive plan computed in part d? 

Temporary current assets 
$ 
Permanent current assets 
Fixed assets 
Total assets 

Earnings after taxes 
$ 
9.Problem 613 Impact of term structure of interest rates on financing plan [LO4]
Winfrey Diet Food Corp. has $5,400,000 in assets. 
Temporary current assets
$
Permanent current assetsFixed assets
Total assets
$
2,800,000 
1,590,000 
1,010,000 
5,400,000 
Shortterm rates are 12 percent. Longterm rates are 8 percent. Earnings before interest and taxes are $1,140,000. The tax rate is 40 percent. 
What will earnings after taxes be? (Omit the “$” sign in your response.) 
Earnings after taxes
$
10.Problem 614 Conservative versus aggressive financing [LO5]
Collins Systems, Inc., is trying to develop an assetfinancing plan. The firm has $360,000 in temporary current assets and $260,000 in permanent current assets. Collins also has $460,000 in fixed assets. 
(a)
Construct two alternative financing plans for the firm. One of the plans should be conservative, with 60 percent of assets financed by longterm sources and the rest financed by shortterm sources. The other plan should be aggressive, with only 20 percent of assets financed by longterm sources and the remaining assets financed by shortterm sources. The current interest rate is 15 percent on longterm funds and 10 percent on shortterm financing. Compute the annual interest payments under each plan.(Omit the “$” sign in your response.) 
Total interest 

Conservative 

Aggressive 
(b)
Given that Collins’s earnings before interest and taxes are $240,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 40 percent. (Omit the “$” sign in your response.) 
Conservative Aggressive
Earning 
11.Problem 615 Alternative financing plans [LO5]
Lear, Inc., has $900,000 in current assets, $400,000 of which are considered permanent current assets. In addition, the firm has $700,000 invested in fixed assets. 
(a)
Lear wishes to finance all fixed assets and half of its permanent current assets with longterm financing costing 8 percent. The balance will be financed with shortterm financing, which currently costs 5 percent. Lear’s earnings before interest and taxes are $300,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent. (Omit the “$” sign in your response.) 
$ 
(b)
As an alternative, Lear might wish to finance all of its fixed assets and permanent current assets plus half of its temporary current assets with longterm financing and the balance with shortterm financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $300,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent. (Omit the “$” sign in your response.) 
Earnings after taxes
$
12.Problem 616 Expectations hypothesis and interest rates [LO4]
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. (Round your answers to 2 decimal places. Omit the “ % ” sign in your response.) 
%
%
%
1year Tbill at beginning of year 1 
6 
% 

1year Tbill at beginning of year 2 
9  
1year Tbill at beginning of year 3 
10  
1year Tbill at beginning of year 4 
12 
Expected return 
2 year security 
3 year security 
4 year security 
13.Problem 618 Interest costs under alternative plans [LO3]
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows: 
$
April
$
9,100
May
March
June
January 
9,100 

February 
3,100 
10,100 

4,100 
5,100 
Shortterm financing will be utilized for the next six months. Projected annual interest rates are: 
January
%
April
%
May
12.0
June
12.0
5.0 
12.0 

6.0 

9.0 
Compute total dollar interest payments for the six months. (Round your intermediate and final answers to 2 decimal places. Omit the “$” sign in your response.) 
$
Total dollar interest payments 
(b1) 
Compute the total dollar interest payments if longterm financing at 12 percent had been utilized throughout the six months? (Omit the “$” sign in your response.) 
Total dollar interest payments
$
(b2) 
If longterm financing at 12 percent had been utilized throughout the six months, would the total dollar interest payments be larger or smaller? 
rev: 12_14_2012
14.Problem 619 Breakeven point in interest rates [LO3]
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January
$
April
$
February
May
March
June
10,300 
10,300 
4,300 
11,300 
5,300 
6,300 
Shortterm financing will be utilized for the next six months. Projected annual interest rates are:
January February
12.0
12.0
7.0 
% 
April 
14.0 
% 
8.0 
May 

11.0 
June 
What longterm interest rate would represent a breakeven point between using shortterm financing and longterm financing? (Round intermediate calculations and final answer to 2 decimal places. Omit the “%” sign in your response.) 
Interest rate 
% 
15. Problem 621 Level production and related financing effects [LO3]
Bombs Away Video Games Corporation has forecasted the following monthly sales: 
January
$
$
February
52,000
April
32,000
May
June
107,000 
July 
52,000 

100,000 
August 

32,000 
September 
62,000 

October 
92,000 

27,000 
November 
112,000 

42,000 
December 
130,000 

Total sales = $840,000 
Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for $5 per unit and costs $2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12. 
Of each month’s sales, 40 percent are for cash and 60 percent are on account. All accounts receivable are collected in the month after the sale is made. 
(a)
Construct a monthly production and inventory schedule in units. Beginning inventory in January is 32,000 units. 
Prepare a monthly schedule of cash receipts. Sales in December before the planning year are $100,000.(Omit the “$” sign in your response.) 
Determine a cash payments schedule for January through December. The production costs of $2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $52,000 per month. (Omit the “$” sign in your response.) 
Prepare a monthly cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is $5,000, which is also the minimum desired. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.) 
rev: 09_27_2012
16. Problem 72 Costbenefit analysis of cash management [LO2]
Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by onehalf day without offending suppliers. The bank has a remote disbursement center in Florida. 
If Neon Light Company has $3.15 million per day in collections and $1.23 million per day in disbursements, how many dollars will the cash management system free up? (Enter your answer in dollars not in millions. Omit the “$” sign in your response.) 
$
Freedup funds 
If Neon Light Company can earn 8 percent per annum on freedup funds, how much will the income be?(Enter your answer in dollars not in millions. Omit the “$” sign in your response.) 
$
Interest on freedup cash 
(c)
If the total cost of the new system is $490,000, should it be implemented? 
17.Problem 74 International cash management [LO2]
Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume that in 2010 it held 250,000 reals in Brazil worth 180,000 dollars. It drew 13 percent interest, but the Brazilian real declined 26 percent against the dollar. 
(a)
What was the value of the holdings, based on U.S. dollars, at yearend? (Omit the “$” sign in your response.) 
$
Value of the holdings 
What was the value of its holdings, based on U.S. dollars, at yearend if instead it drew 10 percent interest and the real went up by 14 percent against the dollar? (Omit the “$” sign in your response.) 
Value of the holdings
$
18.Problem 710 Determination of credit sales [LO4]
Mervyn’s Fine Fashions has an average collection period of 35 days. The accounts receivable balance is $43,750. What is the value of its credit sales? (Use 360 days in a year. Omit the “$” sign in your response) 
$
Credit sales 
rev: 01_05_2013
19.Problem 711 Aging of accounts receivable [LO4]
Route Canal Shipping Company has the following schedule for aging of accounts receivable: 
April
$
March_______
_______
_______
$
Age of receivables 

(1) 
(2) 
(3) 
(4) 

Month of 
Age of 
Amounts 
Percent of 

0–30 
175,440 
_______ 

31–60 
87,720 

61–90 
131,580 

91–120 
43,860 

Total receivables 
438,600 
100% 

(a)
Calculate the percentage of amount due for each month. (Omit the “%” sign in your response.) 
Percent of
amount due
Month of sales 
Total receivables 
(b)
If the firm had $1,548,000 in credit sales over the fourmonth period, compute the average collection period. Average daily sales should be based on a 120day period. 
Average collection period 
(c)
If the firm likes to see its bills collected in 39 days, should it be satisfied with the average collection period? 
(d)
Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied? 
20.Problem 713 Economic ordering quantity [LO5]
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 84,500 units per year, an ordering cost of $12 per order, and carrying costs of $1.20 per unit. 
What is the economic ordering quantity? 
Economic ordering quantity 
(b)
How many orders will be placed during the year? 
Number of orders 
What will the average inventory be? 
Average inventory 
What is the total cost of ordering and carrying inventory? (Omit the “$” sign in your response.) 
Total costs 
21.Problem 715 Economic ordering quantity with safety stock [LO5]
Diagnostic Supplies has expected sales of 72,900 units per year, a carrying cost of $4 per unit, and an ordering cost of $8 per order. 
(a)
What is the economic order quantity? 
Economic order quantity 
What is average inventory? 
Average inventory
(b2)
What is the total carrying cost? (Omit the “$” sign in your response.) 
Total carrying cost 
Assume an additional 60 units of inventory will be required as safety stock. 
(c1) 
What will the new average inventory be? 
Average inventory
(c2) 
What will the new total carrying cost be? (Omit the “$” sign in your response.) 
Total carrying cost
22.Problem 716 Level versus seasonal production [LO5]
Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $20,800, but inventory costs would increase by $260,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 9.5 percent. 
(a1) 
Determine the extra cost or savings of switch over to level production. (Input the amount as positive value. Omit the “$” sign in your response.) 
$
Loss 
(a2) 
Should the company go ahead and switch to level production? 

No 
(b) 
How low would interest rates need to fall before level production would be feasible? (Omit the “%” sign in your response.) 
Interest rate
% 
23.Problem 717 Credit policy decision [LO4]
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $250,000 if credit is extended to these new customers. Of the new accounts receivable generated, 7 percent will prove to be uncollectible. Additional collection costs will be 6 percent of sales, and production and selling costs will be 70 percent of sales. The firm is in the 30 percent tax bracket. 
Compute the incremental income after taxes. (Omit the “$” sign in your response.) 
$
Incremental income after taxes 
(b)
What will Johnson’s incremental return on sales be if these new credit customers are accepted?(Round your answer to 2 decimal places. Omit the “%” sign in your response.) 
%
Incremental return on sales 
If the receivable turnover ratio is 5 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be? (Round your intermediate and final answer to 2 decimal places. Omit the “%” sign in your response.) 
Incremental return on new average investment 
% 
24.Problem 718 Credit policy decision—receivables and inventory [LO4]
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 3 percent of new sales; production and selling costs are 72 percent; and accounts receivable turnover is four times. Assume income taxes of 25 percent and an increase in sales of $77,000. No other asset buildup will be required to support the increased sales activity. 
(a)
What is the level of accounts receivable to support this sales expansion? (Omit the “$” sign in your response.) 
$
Investment in accounts receivable 
(b)
What would be Henderson’s incremental aftertax return on investment? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) 
%
Return on incremental investment 
(c)
Should Henderson liberalize credit if a 20 percent aftertax return on investment is required? 
Assume that Henderson also needs to increase its level of inventory to support new sales and that inventory turnover is four times. 
(d)
What would be the total incremental investment in accounts receivable and inventory to support a $77,000 increase in sales? (Omit the “$” sign in your response.) 
$
Total incremental investment 
(e) 
Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms? 
25.Problem 719 Credit policy decision with changing variables [LO4]
Comiskey Fence Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $324,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $17,000 in additional collection expense. Production and marketing costs represent 72 percent of sales. The firm is in a 35 percent tax bracket and has a receivables turnover of four times. No other asset buildup will be required to service the new customers. The firm has a 8 percent desired return. 
(a1)
Calculate the incremental income after taxes. (Omit the “$” sign in your response.) 
(a2)
Calculate the return on incremental investment. (Round your answer to 2 decimal places.Omit the “%” sign in your response.) 
(a3) 
Should Comiskey Fence Co. extend credit to these customers? 
(b1)
Calculate the incremental income after taxes if 15 percent of the new sales prove uncollectible. (Omit the “$” sign in your response.) 
Incremental income after taxes
(b2)
Calculate the return on incremental investment if 15 percent of the new sales prove uncollectible.(Round your answer to 2 decimal places.Omit the “%” sign in your response.) 
Return on incremental investment
(b3) 
Should credit be extended if 15 percent of the new sales prove uncollectible? 
(c1)
Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible (as in part a)? (Round your answer to 2 decimal places.Omit the “%” sign in your response.) 
Return on incremental investment
(c2)
Should credit be extended if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible (as in part a )? 
26.Problem 721 Credit policy and return on investment [LO4]
Global Services is considering a promotional campaign that will increase annual credit sales by $600,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: 
Accounts receivable 
6x 

Inventory 
12x 

Plant and equipment 
4x 
All $600,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 9 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 25 percent. 
Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together. (Omit the “$” sign in your response.) 
Accounts receivable
$
$
Total Investment 
Compute the accounts receivable collection costs and production and selling costs and add the two figures together. (Omit the “$” sign in your response.) 
$
$
Collection cost 
Production and selling costs 
Total costs related to accounts receivable 
Compute the costs of carrying inventory. (Omit the “$” sign in your response.) 
$
Cost of carrying inventory 
(d)
Compute the depreciation expense on new plant and equipment. (Omit the “$” sign in your response.) 
$
Depreciation expense 
Compute total cost. (Omit the “$” sign in your response.) 
Total costs
$
(f) 
Compute income after taxes. (Omit the “$” sign in your response.) 
$
Income after taxes 
(g) 
If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem? 
27.Problem 722 Credit policy and return on investment [LO4]
Global Services is considering a promotional campaign that will increase annual credit sales by $570,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows: 
Accounts receivable Inventory
3x
3x 

1x 
All $570,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 70 percent of sales. The cost to carry inventory will be 6 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent. 
What is the value for inventory investment? (Omit the “$” sign in your response.) 
$
Inventory investment 
(b1)
Compute the total investment. (Omit the “$” sign in your response.) 
$
Total investment 
Compute the cost of carrying inventory. (Omit the “$” sign in your response.) 
Cost of carrying inventory
$
(b3)Compute income after taxes. (Omit the “$” sign in your response.)
Income after taxes
$
(b4) 
What would be the return on investment? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) 
%
Return on investment 
(b5) 
If the required rate of return is 8 percent, should the campaign be undertaken? 
28.Problem 725 Credit policy decision with changing variables [LO4]
Dome Metals has credit sales of $108,000 yearly with credit terms of net 60 days, which is also the average collection period. 
(a)
If Dome offered a 3 percent discount for payment in 15 days and every customer took advantage of the new terms and reduces its bank loans, which cost 8 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm? (Input the amount as positive value. Omit the “$” sign in your response.) 
Loss
$
Net change in income 
(b) 
Should it offer the discount? 