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Compute accounts receivable and situational accounting questions. See attached file for full problem description.

1. Text Problems, Exercises, and Case
Prepare answers to the following problems from the text, Fundamentals of Corporate Finance, (Brealey):

a. Chapter 19: Quiz Problem 1
Working Capital Management. Indicate how each of the following six different transactions that a company might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

b. Chapter 19: Practice Problem 14

Forecasting Collections. Here is a forecast of sales by National Bromide for the first 4 months of 2004 (figures in thousands of dollars):

Month: 1 2 3 4
Cash sales
15
24
18
14

Sales on credit
100
120
90
70

14. Forecasting Payments. If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter? In the following quarter? What if its payment delay is 60 days?

c. Chapter 20: Quiz Problem 4

4. Lock Boxes. Anne Teak, the financial manager of a furniture manufacturer, is considering operating a lock-box system. She forecasts that 400 payments a day will be made to lock boxes with an average payment size of $2,000. The bank's charge for operating the lock boxes is $.40 a check. The interest rate is .015 percent per day.
a. If the lock box saves 2 days in collection float, is it worthwhile to adopt the system?
b. What minimum reduction in the time to collect and process each check is needed to justify use of the lock-box system?

Prepare answers to the following problems, exercise, and case from the text, Accounting: Concepts & Applications, (Albrecht):

Exercise 7-17 Assessing How Well Companies Manage Their Receivables
Assume that Hickory Company has the following data related to its accounts receivable:
2005
2006

Net sales
$1,425,000
$1,650,000

Net receivables:

Beginning of year
375,000
333,500

End of year
420,000
375,000

Chapter 7: Exercise 7-.17
Use these data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006. Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in 2005?

a. Chapter 7: Case 7-3
The president, vice president, and sales manager of Moorer Corporation were discussing the company's present credit policy. The sales manager suggested that potential sales were being lost to competitors because of Moorer Corporation's tight restrictions on granting credit to consumers. He stated that if credit policies were loosened, the current year's estimated credit sales of $3,000,000 could be increased by at least 20% next year with an increase in uncollectible accounts receivable of only $10,000 over this year's amount of $37,500. He argued that because the company's cost of sales is only 25% of revenues, the company would certainly come out ahead.

The vice president, however, suggested that a better alternative to easier credit terms would be to accept consumer credit cards such as VISA or MASTERCARD. She argued that this alternative could increase sales by 40%. The credit card finance charges to Moorer Corporation would be 4% of the additional sales.

At this point, the president interrupted by saying that he wasn't at all sure that increasing credit sales of any kind was a good thing. In fact, he suggested that the $37,500 of uncollectible accounts receivable was altogether too high. He wondered whether the company should discontinue offering sales on account.

With the information given, determine whether Moorer Corporation would be better off under the sales manager's proposal or the vice president's proposal. Also, address the president's suggestion that credit sales of all types be abolished.

b. Chapter 21: Problem 21-5

Problem 21-5 JIT Inventory
The president of Penman Corporation, John Burton, has asked you, the company's controller, to advise him on whether Penman should develop a just-in-time (JIT) inventory system. Your research concludes that there is a high cost associated with inventory storage facilities; that inventories use a large portion of the company's cash flow; and that because of the nature of the inventory, there is a significant amount of shrinkage. Research also shows that neither of Penman's two competitors uses a JIT inventory system. Most of Penman's employees are trained to do only one job and belong to a local union. The union is strong and, in the past, has opposed major production changes. The union believes major changes will result in the loss of union employees' jobs. Your research indicates that Penman's major production item (a fairly new product in the market) should continue to have strong sales growth.

Required:
1. Using the information provided, advise John Burton to either continue the present system or work to develop a JIT inventory system.
2. Assume John decides to develop an inventory management system. He plans to evaluate the system after one year. List at least four possible performance measures John could use to evaluate the effectiveness of the system. Describe what information these measures would provide John.

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1. Text Problems, Exercises, and Case
Prepare answers to the following problems from the text, Fundamentals of Corporate Finance, (Brealey):

a. Chapter 19: Quiz Problem 1
Working Capital Management. Indicate how each of the following six different transactions that a company might make would affect (i) cash and (ii) net working capital:
a. Paying out a $2 million cash dividend.
b. A customer paying a $2,500 bill resulting from a previous sale.
c. Paying $5,000 previously owed to one of its suppliers.
d. Borrowing $1 million long-term and investing the proceeds in inventory.
e. Borrowing $1 million short-term and investing the proceeds in inventory.
f. Selling $5 million of marketable securities for cash.

a. Cash will reduce and working capital will reduce.
b. Cash will increase. No Change in Working Capital ( The accounts receivable get converted to cash and no change in the total current assets)
c. Cash will reduce. No change in working capital ( cash will reduce and accounts payable will reduce)
d. No change in cash ( the cash is invested in working capital). Working Capital will increase ( the long term loan is not a part of working capital and inventory increases)
e. No change in cash. Working Capital not change as current assets and current liabilities change by the same amount.
f. Increase in cash. No change in working capital ( type of asset changes - marketable securities to cash).

b. Chapter 19: Practice Problem 14

Forecasting Collections. Here is a forecast of sales by National Bromide for the first 4 months of 2004 (figures in thousands of dollars):

Month: 1 2 3 4
Cash sales
15
24
18
14

Sales on credit
100
120
90
70

On average, 50 percent of credit sales are paid for in the current month, 30 percent in the
next month, and the remainder in the month after that. What are expected cash collections
in months 3 and 4?

The collection would the cash sales in the month and the collection from the credit sales.

Month 3:
$18,000 + (0.5  $90,000) + (0.3  $120,000) + (0.2  $100,000) = $119,000
Month 4:
$14,000 + (0.5  $70,000) + (0.3  $90,000) + (0.2  $120,000) = $100,000

14. Forecasting Payments. If a firm pays its bills with a 30-day delay, what fraction of its purchases will be paid for in the current quarter? In the following quarter? What if its payment delay is 60 days?

A 30-day period is one-third of a calendar quarter. So one-third of the purchases will be paid in the next quarter, and two-thirds will be paid in the current quarter. If the payment delay is 60 days, then two-thirds of the purchases will be paid for in the next quarter and one-third will be paid in the current quarter

c. Chapter 20: Quiz Problem 4

4. Lock Boxes. ...

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Finance questions on different concepts

1. Which of the following statements concerning common stock and the investment banking process is not correct?

A. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
B. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.
C. Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm.
D. Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer.
E. The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.

2. Which of the following statements about listing on a stock exchange is most correct?

A. Listing is a decision of more significance to a firm than going public.
B. Any firm can be listed on the NYSE as long as it pays the listing fee.
C. Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.
D. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
E. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.

3. Heavy use of off-balance sheet lease financing will tend to

A. make a company appear more risky than it actually is because its stated debt ratio will be increased.
B. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
C. affect a company's cash flows but not its degree of risk.
D. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
E. affect the lessee's cash flows but only due to tax effects.

4. Sutton 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?

A. $177,169
B. $196,854
C. $207,215
D. $217,576
E. $228,455

5. Europa Corporation is financing an ongoing construction project. The firm will need $5,000,000 of new capital during each of the next 3 years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds. Yearly flotation costs for 3 separate issues of debt would be 3.0% of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?

A. $79,425
B. $83,606
C. $88,006
D. $92,406

6. The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding?

A. $278,606
B. $292,536
C. $307,163
D. $322,521
E. $338,647

7. The basic doctrine of fairness under bankruptcy provisions states that claims must be recognized in order of their legal and contractual priority.

A. True
B. False

8. Which of the following is generally not true and an advantage of going public.

A. Facilitates stockholder diversification.
B. Increases the liquidity of the firm's stock.
C. Makes it easier to obtain new equity capital.
D. Establishes a market value of the firm.
E. Makes it easier for owner-managers to engage in profitable self-dealings.

9. Which of the following statements is not correct?

A. When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately held."
B. "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
C. Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.
D. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
E. It is possible for a firm to go public and yet not raise any additional new capital.

10. What would be the priority of the claims as to the distribution of assets in a liquidation under Chapter 7 of the Bankruptcy Act? From highest to lowest.

(1) Trustee's costs to administer and operate the firm.
(2) Common Stockholders.
(3) General, or unsecured, creditors.
(4) Secured creditors, who have a claim to the proceeds from the sale of specific property pledged to secure a loan.
(5) Taxes due to federal and state governments.

A. 1, 4, 3, 5, 2
B. 5, 4, 1, 3, 2
C. 4, 1, 5, 3, 2
D. 5, 1, 4, 2, 3
E. 1, 5, 4, 3, 2

11. Which of the following statements is most correct?

A. In a private placement, securities are sold to private (individual) investors rather than to institutions.
B. Private placements occur most frequently with stocks, but bonds can be sold in private placement.
C. Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
D. The SEC requires that all private placements be handled by a registered investment banker.
E. Private placements can generally bring in funds faster than is the case with public offerings.

12. Dakota Trucking Company (DTC) is evaluating a potential leas for a truck with a 4 year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck,m it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. What is the NAL? (Note: MACRS rates for Years 1 to 4 are 0.33, 0.45, 0.15, and 0.07.)

A. $849
B. $896
C. $945
D. $997
E. $1,047

13. Rainier Bros. has 12% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it profitable to call the bonds today?

A. 9.29%
B. 9.78%
C. 10.29%
D. 10.81%
E. 11.35%

14. Bankruptcy plays no role in settling labour disputes and product liability suits. Such issues are outside the bounds of bankruptcy law and are covered by other statutes.

A. True.
B. False.

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