978-0073382395 Chapter 18 Questions and Problems 13-17

Type

Quiz

Book Title

Fundamentals of Corporate Finance Standard Edition 9th Edition

ISBN 13

978-0073382395

April 3, 2019

B-310 SOLUTIONS

11. The sales collections each month will be:

Sales collections = .35(current month sales) + .60(previous month sales)

Given this collection, the cash budget will be:

April May June

Beginning cash balance $140,000 $101,600 $104,100

Cash receipts

Cash collections from

credit sales 283,500 361,400 371,700

Total cash available $423,500 463,000 475,800

Cash disbursements

Purchases $168,000 $147,800 $176,300

Wages, taxes, and expenses 53,800 51,000 78,300

Interest 13,100 13,100 13,100

Equipment purchases 87,000 147,000 0

Total cash disbursements $321,900 $358,900 $267,700

Ending cash balance $101,600 $104,100 $208,100

12. Item

Source/Use Amount

Cash Source $1,100

Accounts receivable Use –$4,300

Inventories Use –$3,670

Property, plant, and equipment Use –$12,720

Accounts payable Source $2,600

Accrued expenses Use –$810

Long-term debt Source $3,000

Common stock Source $5,000

Accumulated retained earnings Source $1,610

Intermediate

13. a. If you borrow $50,000,000 for one month, you will pay interest of:

Interest = $50,000,000(.0064)

Interest = $320,000

However, with the compensating balance, you will only get the use of:

Amount received = $50,000,000 – 50,000,000(.05)

Amount received = $47,500,000

This means the periodic interest rate is:

Periodic interest = $320,000/$47,500,000

14. a. The EAR of your investment account is:

b. To calculate the EAR of the loan, we can divide the interest on the loan by the amount of the loan.

The interest on the loan includes the opportunity cost of the compensating balance. The

opportunity cost is the amount of the compensating balance times the potential interest rate you

could have earned. The compensating balance is only on the unused portion of the credit line, so:

Opportunity cost = .04($70,000,000 – 45,000,000)(1.012)4 – .04($70,000,000 – 45,000,000)

Opportunity cost = $48,870.93

c. The compensating balance is only applied to the unused portion of the credit line, so the EAR of a

loan on the full credit line is:

B-312 SOLUTIONS

15. a. A 45-day collection period means sales collections each quarter are:

Collections = 1/2 current sales + 1/2 old sales

A 36-day payables period means payables each quarter are:

Payables = 3/5 current orders + 2/5 old orders

CHAPTER 18 B-313

With a $30 million minimum cash balance, the short-term financial plan will be:

WILDCAT, INC.

Short-Term Financial Plan

(in millions)

Q1 Q2 Q3 Q4

Beginning cash balance $30.00 $30.00 $30.00 $30.00

Net cash inflow 22.10 –40.55 19.55 65.30

New short-term investments –22.78 0 –19.90 –65.70

Income on short-term investments 0.68 1.14 0.35 0.40

Short-term investments sold 0 39.41 0 0

New short-term borrowing 0 0 0 0

Interest on short-term borrowing 0 0 0 0

Short-term borrowing repaid 0 0 0 0

Ending cash balance $30.00 $30.00 $30.00 $30.00

Minimum cash balance –30.00 –30.00 –30.00 –30.00

Cumulative surplus (deficit) $0 $0 $0 $0

Beginning short-term investments $34.00 $56.78 $0 $17.37

Ending short-term investments $56.78 $17.37 $19.90 $83.46

B-314 SOLUTIONS

16. a. With a minimum cash balance of $50 million, the short-term financial plan will be:

WILDCAT, INC.

Short-Term Financial Plan

(in millions)

Q1 Q2 Q3 Q4

Beginning cash balance $50.00 $50.00 $50.00 $50.00

Net cash inflow 22.10 –40.55 19.55 65.30

New short-term investments –22.38 0 –16.00 –65.62

Income on short-term investments 0.28 0.73 0 0.32

Short-term investments sold 0 36.38 0 0

New short-term borrowing 0 3.44 0 0

Interest on short-term borrowing 0 0 –0.10 0

CHAPTER 18 B-315

b. And with a minimum cash balance of $10 million, the short-term financial plan will be:

WILDCAT, INC.

Short-Term Financial Plan

(in millions)

Q1 Q2 Q3 Q4

Beginning cash balance $10.00 $10.00 $10.00 $10.00

Net cash inflow 22.10 –40.55 19.55 65.30

New short-term investments –23.18 0–20.31 –65.71

Income on short-term investments 1.08 1.54 0.76 0.41

Short-term investments sold 0 39.01 0 0

New short-term borrowing 0 0 0 0

Interest on short-term borrowing 0 0 0 0

Short-term borrowing repaid 0 0 0 0

B-316 SOLUTIONS

Challenge

17. a. For every dollar borrowed, you pay interest of:

Interest = $1(.019) = $0.019

You also must maintain a compensating balance of 4 percent of the funds borrowed, so for each

dollar borrowed, you will only receive:

Amount received = $1(1 – .04) = $0.96

b. The EAR is the amount of interest paid on the loan divided by the amount received when the loan

is originated. The amount of interest you will pay on the loan is the amount of the loan times the

effective annual interest rate, so:

Interest = $130,000,000[(1.019)4 – 1]

Interest = $10,165,163.62