1. A firm has sales of $3 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is $285,000. What is the average collection period? (Use a 360-day year.)
2. Bronco Truck Parts expects to sell the following number of units at the prices indicated under three different scenarios in the economy. The probability of each outcome is indicated. What is the expected value of the total sales projection?
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Column 1
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Column 2
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Column 3
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Column 4
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Column 5
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Column 6
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Outcome
|
Probability
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Units
|
Price
|
Total Value
|
Total Expected Value
|
|
A
|
0.40
|
350
|
$21
|
$7,350
|
$2,940
|
|
B
|
0.10
|
600
|
$30
|
$18,000
|
$3, 675
|
|
C
|
0.50
|
1,050
|
$35
|
$36, 750
|
$18, 375
|
3. Al Rosen invests $25,000 in a mint condition 1952 Mickey Mantle Topps baseball card. He expects the card to increase in value 12 percent per year for the next 10 years. How much will his card be worth after 10 years?
4. If you owe $35,000 payable at the end of eight years, what amount should your creditor accept in payment immediately if she could earn 13 percent on her money?
5. Speedy Delivery Systems can buy a piece of equipment that is anticipated to provide an11 percent return and can be financed at 6 percent with debt. Later in the year, the firm turns downan opportunity to buy a new machine that would yield a 9 percent return but would cost 15 percent to finance through common equity. Assume debt and common equity each represent 50 percent of the firm's capital structure.
a. Compute the weighted average cost of capital.
b. Which project(s) should be accepted?
Q6. Assume a corporation has earnings before depreciation and taxes of $90,000, depreciation of $40,000, and that it is in a 30 percent tax bracket. Compute its cash flow using the following format.
Earnings before depreciation and taxes $90,000
Depreciation -40,000
before taxes 50,000
Taxes @ 30% -15,000
Earnings after taxes $35,000
Depreciation +40,000
Cash flow $75,000
7. The Hudson Corporation makes an investment of $24,000 that provides the following cash flow:
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Year
|
Cash Flow
|
|
1................
|
$ 13,000
|
|
2................
|
13,000
|
|
3................
|
4,000
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a. What is the net present value at an 8 percent discount rate?
b. What is the internal rate of return?
8. Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given next:
|
Possible
Market Reaction
|
Sales
in Units
|
Probabilities
|
|
Low response...........................................
|
20
|
.10
|
|
Moderate response..................................
|
40
|
.30
|
|
High response...........................................
|
55
|
.40
|
|
Very high response...................................
|
70
|
.20
|
a. What is the expected value of unit sales for the new product?
b. What is the standard deviation of unit sales?
9. A company wishes to maintain a capital structure consisting of 20% debt, 40% Preferred Stock, and 40% Common Stock. The before tax cost of the debt is 6%, the cost of the Preferred Stock is 9% and the cost of the Common Stock is 10%. The company has a 35% tax rate. Compute its WACC.
10. You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years you will live after retirement. You know that you will be able to earn 11% per year during the 30-year retirement period.
a. How large a fund will you need when you retire in 20 years to provide the 30 year, $20,000 retirement annuity?
b. How much will you need today as a single amount to provide the fund calculated in part "a" if you earn only 9% per year during the 20 years preceding retirement?