Assignment - Answer question 1 or 2, and 7 of the remaining questions (3 through 10).

Q1. Describe the decision making process for either a or b below. (Circle the one you elect to describe):

a. A corporation is considering a proposed change in a company's credit policy; or

b. A corporation is considering a request from a new customer that the company extend credit to the customer on a proposed purchase.

Q2. Describe the decision making process for one of a, b, or c below. (Circle the one you elect to describe.)

a. A firm is trying to determine when to make payment on an account payable for which the supplier offers a cash discount.

b. A firm is trying to determine how many units of a component part it utilizes in its product it should order when the inventory levels or that component get low.

Q3. Describe two different methods an analyst can use to estimate the horizon value of a proposed project. (Be specific about required calculations.)

Q4a. A retailer in a midwest farming community located on an interstate believes that its sales are affected by crop prices, gas prices, and weather. Explain how the company can empirically test whether these factors actually affect sales, including the information necessary, the type of test performed, and the nature of the result that indicates a factor does have an effect.

b. Assuming that by doing such a test, the company determines that one of those factors (your choice) does affect sales, identify one financial contract the company might use to hedge the risk associated with that factor. Be as specific as possible about the type of contract, the position the company should (given your assumption about the observed effect), and identify any cost required to hedge in the manner described.

Q5a. Based on the expected net present value of a proposed capital budgeting project funded entirely with equity, a company has decided to proceed with the project. Explain how funding a portion of the project with debt will affect the project's value.

b. Identify two different methods the company can use to estimate the net present value of the project funded partially with debt. For one of the identified methods, explain how the NPV of the leveraged project is calculated. Be as specific as possible about the information needed and the calculations that must be made.

Q6. Describe how each of the following affect the expected operating cash flow for a proposed capital budgeting project (be as specific and complete as possible):

a. the depreciation deduction for the building constructed to house the project.

b. the taxes paid on sale of the equipment at the end of the project.

c. the compensation paid to an existing employee who will be managing the project's operations.

d. interest payable on debt used to finance the project.

e. uncollectible accounts receivable.

f. the initial cost of land for the project.

g. the variability in the cost of raw materials for the project.

Q7a. Explain how the cash inflows and outflows forecast for use in a cash budget differ from those forecast for use in a capital budgeting analysis.

b. Explain how the purpose of the cash budget forecast differs and from that of the capital budgeting forecast, and why differences identified in part a are appropriate given the difference in purpose.

Q8a. Explain why it is better to make decisions about acceptance or rejection of proposed projects based on project net present value rather than on project internal rate of return.

b. If a firm uses internal rate of return as the basis for its capital budgeting decisions, identify two things the firm should do to avoid making bad decisions due to shortcomings of the internal rate of return as a decision rule.

Q9. A company presently maintains a bank account for operating funds. It deposits funds from purchases made by cash or checks into this account, and the account automatically receives funds from purchases made by credit or debit card. The company pays operating costs such as accounts payable and payroll from this account. Any funds in the account at the end of the day are automatically invested overnight at fed funds rates. The company also maintains an account with a securities firm. The funds in this investment account earn a higher return than those in the bank account.

a. Explain what recommendation you would make to the firm about the amount it holds in the two accounts

b. Describe the calculations that are needed in order to follow your recommendation. (Be as specific as possible).

Q10a. Describe two different methods an analyst can use to estimate the horizon value of a proposed project. (Be specific about required calculations.)

b. If horizon value is estimated using the two methods discussed in part a and with the assumption that the project will be funded entirely with equity, explain how one of the horizon value estimates is affected if the project is partially funded by debt.