Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks.  The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks’ average.  If this were done, by how much would inventories decline?  Use a 365-day year.


Cost of goods sold =                                 $85,000

Inventory =                                          $20,000

Inventory conversion period (ICP) =                    85.88

Benchmark inventory conversion period (ICP) =          38.00

(Points : 10)



Question 12. 12.

Taylor Textbooks, Inc., buys on terms of 2/15, net 50 days.  It does not take discounts, and it typically pays on time, 50 days after the invoice date.  Net purchases amount to $450,000 per year.  On average, what is the dollar amount ofcostly trade credit (total credit – free credit) the firm receives during the year?  (Assume a 365-day year, and note that purchases are net of discounts.)

(Points : 20)




Question 13. 13.

Stanley Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-year, $6,000,000 bank loan to finance service equipment.  The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments.  Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.  How much larger or smaller is the bank loan payment than the lease payment?  Note: Subtract the loan payment from the lease payment.

(Points : 20)




Question 14. 14.

Waldrop Corporation is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years.  The tools will be obsolete and worthless after 3 years.  The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life.  It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them.  The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year.  The firm's tax rate is 40%.  Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases.  What is the net advantage to leasing (NAL), in thousands?  (Suggestion: Delete 3 zeros from dollars and work in thousands.)

(Points : 20)




Question 15. 15.

10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.

(Points : 20)



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