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Collins Systems, Inc., is trying to develop an asset-financing plan. The firm has $520,000 in temporary current assets and $420,000 in permanent current assets. Collins also has $620,000 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 long-term sources and the rest financed by short-term sources. The other plan should be aggressive, with only 20 percent of assets financed by long-term sources and the remaining assets financed by short-term sources. The current interest rate is 13 percent on long-term funds and 8 percent on short-term 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 $400,000, calculate earnings after taxes for each of your alternatives. Assume a tax rate of 25 percent. (Omit the "$" sign in your response.)

Earning after taxes

  Conservative

$   

  Aggressive

$   

Biochemical Corp. requires $690,000 in financing over the next three years. The firm can borrow the funds for three years at 9.25 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 7.50 percent interest in the first year, 12.15 percent interest in the second year, and 8.25 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 short-term financing

$     

(b)

Which plan is less costly?

Winfrey Diet Food Corp. has $4,950,000 in assets.

  Temporary current assets

$

1,900,000  

  Permanent current assets

1,545,000  

  Fixed assets

1,505,000  

      Total assets

$

4,950,000  

Short-term rates are 9 percent. Long-term rates are 14 percent. Earnings before interest and taxes are $1,050,000. The tax rate is 40 percent.

     If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? (Omit the "$" sign in your response.)

  Earnings after taxes

$   

Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:

  January

$

9,600  

  April

$

9,600  

  February

3,600  

  May

10,600  

  March

4,600  

  June

5,600  

Short-term financing will be utilized for the next six months. Projected annual interest rates are:

  January

5.0

 %

  April

12.0

 %

  February

6.0

  May

12.0

  March

9.0

  June

12.0

(a)

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

$   

(b-1)

Compute the total dollar interest payments if long-term financing at 12 percent had been utilized throughout the six months? (Omit the "$" sign in your response.)

  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?

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:

  March

3,100  

  April

7,100  

  May

11,200  

  June

9,200  

30,600  

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 30,600 units over four months at a level of 7,650 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.)

Ending inventory

  March

  April

  May

  June

(b)

If the inventory costs $12 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Inventory financing cost

  March

$   

  April

  May

  June

  Total financing cost

$ 

Global Services is considering a promotional campaign that will increase annual credit sales by $540,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

  Accounts receivable

4x  

  Inventory

4x  

  Plant and equipment

2x  

All $540,000 of the sales will be collectible. However, collection costs will be 5 percent of sales, and production and selling costs will be 74 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 15 percent of plant and equipment. The tax rate is 25 percent.

(a)

What is the value for inventory investment? (Omit the "$" sign in your response.)

  Inventory investment

$   

(b-1)

Compute the total investment. (Omit the "$" sign in your response.)

  Total investment

$   

(b-2)

Compute the cost of carrying inventory. (Omit the "$" sign in your response.)

  Cost of carrying inventory

$   

(b-3)

Compute income after taxes. (Omit the "$" sign in your response.)

  Income after taxes

$   

(b-4)

What would be the return on investment? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

  Return on investment

 %  

(b-5)

If the required rate of return is 10 percent, should the campaign be undertaken?

Global Services is considering a promotional campaign that will increase annual credit sales by $630,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

  Accounts receivable

5x  

  Inventory

8x  

  Plant and equipment

3x  

All $630,000 of the sales will be collectible. However, collection costs will be 4 percent of sales, and production and selling costs will be 74 percent of sales. The cost to carry inventory will be 8 percent of inventory. Depreciation expense on plant and equipment will be 20 percent of plant and equipment. The tax rate is 25 percent.

(a)

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

$   

  Inventory

  Plant and equipment

  Total Investment

$   

(b)

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

$   

(c)

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

$   

(e)

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 14 percent, should it undertake the promotional campaign described throughout this problem?