Data on Liu Inc. for the
most recent year are shown below, along with the inventory conversion
period (ICP) of the firms against which it benchmarks. The firm’s new
CFO believes that the company could reduce its inventory enough to reduce
its ICP to the benchmarks’ average. If this were done, by how much
would inventories decline? Use a 365-day year.

Cost of goods sold


Inventory conversion period

Benchmark inventory conversion
period (ICP) = 38.00

: 10)

$ 7,316

$ 8,129

$ 9,032



2. 2.

Data on Mertz Co., for the most
recent year are shown below, along with the payables deferral period
(PDP) for the firms against which it benchmarks. The firm’s new CFO
believes that the company could delay payments enough to increase its PDP
to the benchmarks’ average. If this were done, by how much would
payables increase? Use a 365-day year.

Cost of goods sold


Payables deferral period (PDP)

Benchmark payables deferral

: 10)

$ 764

$ 849

$ 943



3. 3.

Shulman Inc. has the
following data, in thousands. Assuming a 365-day year, what is the
firm’s cash conversion cycle?

Annual sales

Annual cost of goods sold


Accounts receivable

Accounts payable

: 10)

28 Days

32 Days

35 Days

39 Days

43 Days

4. 4.

Howes Inc. purchases
$4,562,500 in goods per year from its sole supplier on terms of 2/15, net
50. If the firm chooses to pay on time but does not take the
discount, what is the effective annual percentage cost of its
non-free trade credit? (Assume a 365-day year.)

: 10)






5. 5.

Noddings Inc.’s business is
booming, and it needs to raise more capital. The company purchases
supplies on terms of 1/10 net 20, and it currently takes the
discount. One way of getting the needed funds would be to forgo the
discount, and the firm’s owner believes she could delay payment to 40 days
without adverse effects. What would be the effective annual
percentage cost
of funds raised by this action? (Assume a 365-day

: 10)






6. 6.

In 1985, a given Japanese
imported automobile sold for 1,476,000 yen, or $8,200. If the car
still sold for the same amount of yen today but the current exchange rate
is 144 yen per dollar, what would the car be selling for today in U.S.

: 10)






7. 7.

Suppose in the spot market 1
U.S. dollar equals 1.60 Canadian dollars. 6-month Canadian securities
have an annualized return of 6% (and thus a 6-month periodic return of
3%). 6-month U.S. securities have an annualized return of 6.5% and a
periodic return of 3.25%. If interest rate parity holds, what is the
U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?

: 10)

1 U.S. dollar = 0.6235 Canadian

1 U.S. dollar = 0.6265 Canadian

1 U.S. dollar = 1.0000 Canadian

1 U.S. dollar = 1.5961 Canadian

1 U.S. dollar = 1.6039 Canadian

8. 8.Suppose
one year ago, Stackpool inc. had inventory in Britain valued at
240,000 pounds. The exchange rate for dollars to pounds was 1£ = 2
U.S. dollars. This year the exchange rate is 1£ = 1.82 U.S.
dollars. The inventory in Britain is still valued at 240,000
pounds. What is the gain or loss in inventory value in U.S. dollars
as a result of the change in exchange rates? (Points : 10)






9. 9.

In its negotiations
with its investment bankers, Patton Electronics has reached an agreement
whereby the investment bankers receive a smaller fee now (6% of gross
proceeds versus their normal 10%) but also receive a 1-year option to
purchase an additional 200,000 shares at $5.00 per share. Patton will go
public by selling $5,000,000 of new common stock. The investment bankers
expect to exercise the option and purchase the 200,000 shares in exactly
one year, when the stock price is forecasted to be $6.50 per share.
However, there is a chance that the stock price will actually be $12.00 per
share one year from now. If the $12 price occurs, what would the present
value of the entire underwriting compensation be? Assume that the investment
banker’s required return on such arrangements is 15%, and ignore taxes.

: 10)






10. 10.

The company you just
started has been offered credit terms of 4/30, net 90 days. What will be
the nominal annual percentage cost of its non-free trade credit if
it pays 120 days after the purchase? (Assume a 365-day year.)

: 10)






11.Whitson Co. has annual sales of $36,500,000, or $100,000 a
day on a 365-day basis. The firm’s cost of goods sold is 75% of
sales. On average, the company has $9,000,000 in inventory and $8,000,000
in accounts receivable. The firm is looking for ways to shorten its
cash conversion cycle. Its CFO has proposed new policies that would
result in a 20% reduction in both average inventories and accounts
receivable. She also anticipates that these policies would reduce sales
by 10%, while the payables deferral period would remain unchanged at 35
days. What effect would these policies have on the company’s cash
conversion cycle? Round to the nearest whole day. (Points : 20)

Question 12. 12.

Taylor Textbooks, Inc., buys
on terms of 2/15, net 50 days. It does not take discounts, and it
typically pays on time, 50 days after the invoice date. Net purchases
amount to $450,000 per year. On average, what is the dollar amount of costly
trade credit (total credit – free credit) the firm receives during the
year? (Assume a 365-day year, and note that purchases are net of

(Points : 20)

Question 13. 13.

Stanley 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? Note: Subtract the loan payment
from the lease payment.

(Points : 20)

Question 14. 14.

Waldrop Corporation is
considering a leasing arrangement to finance some manufacturing tools that it
needs for the next 3 years. The tools will be obsolete and worthless
after 3 years. The firm will depreciate the cost of the tools on a straight-line
basis over their 3-year life. It can borrow $4,800,000, the purchase
price, at 10% and buy the tools, or it can make 3 equal end-of-year lease
payments of $2,100,000 each and lease them. The loan obtained from the
bank is a 3-year simple interest loan, with interest paid at the end of the
year. The firm’s tax rate is 40%. Annual maintenance costs
associated with ownership are estimated at $240,000, but this cost would be
borne by the lessor if it leases. What is the net advantage to leasing
(NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work
in thousands.)

(Points : 20)

Question 15. 15.

10 years
ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual
payment, tax-exempt muni bonds. The bonds had 10 years of call protection,
but now the bonds can be called if the city chooses to do so. The call
premium would be 6% of the face amount. New 20-year, 6%, semiannual payment
bonds can be sold at par, but flotation costs on this issue would be 2% of the
amount of bonds sold. What is the net present value of the refunding? Note
that cities pay no income taxes, hence taxes are not relevant.

(Points : 20)