1) Tierney Enterprises is constructing its cash budget. Its budgeted monthly sales are $5,000, and they are constant from month to month. 40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next month's sales are constant at 50% of projected sales for the next month. "Other payments," which include wages, rent, and taxes, are 25% of sales for the current month. Construct a cash budget for a typical month and calculate the average net cash flow during the month.
2) Cost of short-term credit:
a. Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. However, planting, irrigating, and harvesting must be done on a nearly continual schedule. The firm uses 90-day bank notes to finance its operations. The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. What is the effective annual interest rate of these discount loans?
b. Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on", one-year installment loan, payable in four equal quarterly payments. What is the effective annual rate of interest?
c. Yonge buys on terms 1/15 net 60. What is the effective annual cost of trade credit? (Assume 360 days/year).
*just answer C*
3) Hedging: The Zinn Company plans to issue $10,000,000 of 20-year bonds I June to help finance a new research and development laboratory. The bonds will pay interest semiannually. It is now November, and the current cost of debt to the high-risk biotech company is 7.0% However, the firm's finance manager is concerned that interest rates will climb even higher in coming months. a futures contract with June deliver is available at a price quoted as 96'24
a. Use this information to create a hedge against rising interest rates.
b. Assume that interest rates in general increase by 200 basis points. How well did your hedge perform?
*just answer B*