Short-term versus longer-term borrowing
1.Problem 6-2 Expected value [LO6]
| Sharpe Knife Company expects sales next year to be $1,540,000 if the economy is strong, $820,000 if the economy is steady, and $540,000 if the economy is weak. Mr. Sharpe believes there is a 25 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 15 percent probability of a weak economy. |
| What is the expected level of sales for the next year? (Omit the “$” sign in your response.) |
| Expected level of sales | $ [removed] |
2.Problem 6-4 External financing [LO1]
| Antivirus, Inc., expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $590,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 percent dividend payout. |
| How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the “$” sign in your response.) |
| External funds needed | $ [removed] |
3.Problem 6-6 Level versus seasonal production [LO1]
| Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: |
| March | 3,200 |
| April | 7,200 |
| May | 11,400 |
| June | 9,400 |
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| 31,200 | |
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| If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. |
| The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,200 units over four months at a level of 7,800 per month. |
| (a) | What is the ending inventory at the end of each month? (Leave no cells blank – be certain to enter “0” wherever required.) |
| Ending inventory |
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| March | [removed] |
| April | [removed] |
| May | [removed] |
| June | [removed] |
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| (b) | If the inventory costs $17 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) |
| Inventory financing cost |
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| March | $ [removed] |
| April | [removed] |
| May | [removed] |
| June | [removed] |
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| Total financing cost | $ [removed] |
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rev: 01_07_2013
4.Problem 6-8 Short-term versus longer-term borrowing [LO3]
| Biochemical Corp. requires $530,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes short-term financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. |
| (a) | Determine the total interest cost under each plan. (Omit the “$” sign in your response.) |
| Interest cost | |
| Fixed cost financing | |
| Variable short-term financing | |
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| (b) | Which plan is less costly? |
5.Problem 6-9 Short-term versus longer-term borrowing [LO3]
| Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $410,000. The company can borrow $410,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. |
| (a) | How much would the firm save in interest over the three-year life of the computer system if the one-year loan is utilized, and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent three-year loan. (Omit the “$” sign in your response.) |
| Amount | |
| 9 Percent | |
| 11 Percent | |
| Interest saving | |
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| (b) | What if interest rates on the 9 percent loan go up to 14 percent in the second year and 17 percent in the third year? What would be the total interest cost compared to the 11 percent, three-year loan? (Omit the “$” sign in your response.) |
| Amount | |
| 1st year | |
| 2nd year | |
| 3rd year | |
| Extra interest cost | |
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