财务管理课后答案第六章

Chapter 6

Discussion Questions 6-1.

Explain how rapidly expanding sales can drain the cash resources of a firm.

Rapidly expanding sales will require a buildup in assets to support the growth. In

particular, more and more of the increase in current assets will be permanent in nature. A nonliquidating aggregate stock of current assets will be necessary to allow for floor

displays, multiple items for selection, and other purposes. All of these "asset" investments can drain the cash resources of the firm.

Discuss the relative volatility of short- and long-term interest rates.

Figure 6-10 shows the long-run view of short- and long-term interest rates. Normally, short-term rates are much more volatile than long-term rates.

What is the significance to working capital management of matching sales and production?

If sales and production can be matched, the level of inventory and the amount of current assets needed can be kept to a minimum; therefore, lower financing costs will be incurred. Matching sales and production has the advantage of maintaining smaller amounts of current assets than level production, and therefore less financing costs are incurred. However, if sales are seasonal or cyclical, workers will be laid off in a declining sales climate and machinery (fixed assets) will be idle. Here lies the tradeoff between level and seasonal production: Full utilization of fixed assets with skilled workers and more

financing of current assets versus unused capacity, training and retraining workers, with lower financing for current assets.

How is a cash budget used to help manage current assets?

A cash budget helps minimize current assets by providing a forecast of inflows and

outflows of cash. It also encourages the development of a schedule as to when inventory is produced and maintained for sales (production schedule), and accounts receivables are collected. The cash budget allows us to forecast the level of each current asset and the timing of the buildup and reduction of each.

"The most appropriate financing pattern would be one in which asset buildup and length of financing terms are perfectly matched." Discuss the difficulty involved in achieving this financing pattern.

Only a financial manager with unusual insight and timing could design a plan in which asset buildup and the length of financing terms are perfectly matched. One would need to know exactly what part of current assets are temporary and what part are permanent. Furthermore, one is never quite sure how much short-term or long-term financing is

available at all times. Even if this were known, it would be difficult to change the financing mix on a continual basis.

By using long-term financing to finance part of temporary current assts, a firm may have less risk but lower returns than a firm with a normal financing plan. Explain the significance of this statement.

By establishing a long-term financing arrangement for temporary current assets, a firm is

6-2.

6-3.

6-4.

6-5.

6-6.

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6-7.

6-8.

6-9.

6-10.

assured of having necessary funding in good times as well as bad, thus we say there is low risk. However, long-term financing is generally more expensive than short-term financing and profits may be lower than those which could be achieved with a synchronized or normal financing arrangement for temporary current assets.

A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.

By financing a portion of permanent current assets on a short-term basis, we run the risk of inadequate financing in tight money periods. However, since short-term financing is less expensive than long-term funds, a firm tends to increase its profitability over the long run (assuming it survives). In answer to the preceding question, we stressed less risk and less return; here the emphasis is on risk and high return.

What does the term structure of interest rates indicate?

The term structure of interest rates shows the relative level of short-term and long-term interest rates at a point in time. It is often referred to as a yield curve.

What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.

Liquidity premium theory, the market segmentation theory, and the expectations theory.

The liquidity premium theory indicates that long-term rates should be higher than short-term rates. This premium of long-term rates over short-term rates exists because short-term securities have greater liquidity, and therefore higher rates have to be offered to potential long-term bond buyer to entice them to hold these less liquid and more price sensitive securities.

The market segmentation theory states that Treasury securities are divided into market segments by the various financial institutions investing in the market. The changing needs, desires, and strategies of these investors tend to strongly influence the nature and relationship of short- and long-term rates.

The expectations hypothesis maintains that the yields on long-term securities are a function of short-term rates. The result of the hypothesis is that when long-term rates are much higher than short-term rates, the market is saying that is expects short-term rates to rise. Conversely, when long-term rates are lower than short-term rates, the market is expecting short-term rates to fall.

Since the middle 1960s, corporate liquidity has been declining. What reasons can you give for this trend?

The decrease is liquidity can be traced in part to more efficient inventory management such as just-in-time inventory and point of sales terminals that provide better inventory control. The decline in working capital can also be attributed to electronic cash flow transfer

systems, and the ability to sell accounts receivables through securitization of assets (this is more fully explained in the next chapter). It might also be that management is simply willing to take more liquidity risk as interest rates declined.

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Problems 6-1.

Gary’s Pipe and Steel company expects sales next year to be $800,000 if the economy is strong, $500,000 if the economy is steady, and $350,000 if the economy is weak. Gary believes there is a 20 percent probability the economy will be strong, a 50 percent

probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for next year?

Gary’s Pipe and Steel Company

State of Economy

Strong Steady Weak 6-2.

Expected Outcome Sales Probability $800,000 .20 $160,000 500,000 .50 250,000 350,000 .30 Expected level of sales = $515,000

Solution:

Tobin Supplies Company expects sales next year to be $500,000. Inventory and accounts receivable will have to be increased by $90,000 to accommodate this sales level. The

company has a steady profit margin of 12 percent with a 40 percent dividend payout. How much external financing will Tobin Supplies Company have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

Tobin Supplies Company

$500,000 Sales Profit margin 60,000 Net income Dividends (40%) $ 36,000 Increase in retained earnings

$ 90,000 Increase in assets Increase in retained earnings $ 54,000 External funds needed

Solution:

6-3.

Shamrock Diamonds expects sales next year to be $3,000,000. Inventory and accounts receivable will increase $420,000 to accommodate this sales level. The company has a steady profit margin of 10 percent with a 25 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.

Shamrock Diamonds

Solution:

$3,000,000 300,000 $ 225,000 420,000 Sales

Profit margin Net income

Dividends (25%)

Increase in retained earnings Increase in assets

Increase in retained earnings

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6-4.

$195,000 External funds needed

Mad onna’s Clothiers sells scarves that are very popular in the fall-winter season. Units sold are anticipated as: October 2,000 November 4,000 December 8,000 January 20,000 units

If seasonal production is used, it is assumed that inventory buildup 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 20,000 units over 4 months at a level of 5,000 per month.

a. What is the ending inventory at the end of each month? Compare the units produced

to the units sold and keep a running total.

b. If the inventory costs $7 per unit and will be financed at the bank at a cost of 8%,

what is the monthly financing cost and the total for the 4 months?

6-4. Continued

Solution:

Madonna’s Clothiers a. October November December January b. October November December January 6-5.

Units Produced

5,000 5,000 5,000 5,000

Ending Inventory $3,000 4,000 1,000

Cost per Unit

($7) $21,000 28,000 7,000

Inventory Financing Cost

$1,680 2,240 560 $4,480

Units Sold

2,000

4,000 8,000 6,000

Change in inventory +3,000 +1,000 –3,000 –1,000

Ending Inventory

3,000 4,000 1,000

Procter Micro-Computers, Inc. requires $1,200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly?

Solution:

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Procter-Mini-Computers, Inc.

$1,200,000 borrowed x 9.5% per annum x 2 years = $228,000 interest cost

1st year $1,200,000 x 6.55% per annum = $ 78,600 interest cost 2nd $210,000 two-year total

The short-term plan is less costly. 6-6. Sauer Food Company has decided to buy a new computer system with an expected life of

three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest.

How much would Sauer Food Company 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 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan?

Solution:

Sauer Food Company

If Rates Are Constant

$150,000 borrowed x 8% per annum x 3 years = $36,000 interest cost

$150,000 borrowed x 10% per annum x 3 years = $45,000 interest cost

$45,000 – $36,000 = $9,000 interest savings borrowing short-term If Short-term Rates Change 1st year 2nd year 3rd year

$150,000 x .08 = $12,000 $150,000 x .13 = $19,500 Total = $58,500

$58,500 – $45,000 = $13,500 extra interest costs borrowing short-term. 6-7. Assume Stratton Health Clubs, Inc., has $3,000,000 in assets. If it goes with a low

liquidity plan for the assets, it can earn a return of 20 percent, but with a high liquidity plan, the return will be 13 percent. If the firm goes with a short-term financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a long-term financing plan,

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the financing costs on the $3,000,000 will be 12 percent. (Review Table 6-11 for parts a , b , and c of this problem.)

a. Compute the anticipated return after financing costs on the most aggressive asset-financing mix.

b. Compute the anticipated return after financing costs on the most conservative asset-financing mix.

c. Compute the anticipated return after financing costs on the two moderate approaches

to the asset-financing mix.

d. Would you necessarily accept the plan with the highest return after financing costs?

Briefly explain.

6-7. Continued

Solution:

Stratton Health Clubs, Inc.

a. b. c. d.

Most aggressive

Low liquidity/high return $3,000,000 x 20% = $600,000 Short-term financing –3,000,000 x 10% = Anticipated return $300,000

Most conservative

High liquidity/low return $3,000,000 x 13% = $390,000 Long-term financing –3,000,000 x 12% = Anticipated return $ 30,000

Moderate approach Low liquidity $3,000,000 x 20% = $600,000 Long-term financing –3,000,000 x 12% = $240,000 Or

High liquidity $3,000,000 x 13% = $390,000 Short-term financing –3,000,000 x 10% = $ 90,000

You may not necessarily select the plan with the highest return. You must also consider the risk inherent in the plan. Of course, some firms are better able to take risks than others. The ultimate concern must be for maximizing the overall valuation of the firm through a judicious consideration of risk-return options.

Colter Steel has $4,200,000 in assets.

Temporary current assets ........................... Permanent current assets . ........................... Fixed assets . ............................................... Total assets...............................................

6-8.

$1,000,000 2,000,000 $4,200,000

Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are $996,000. The tax rate is 40 percent.

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If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For an example of perfectly matched plans, see Figure 6-5.

Solution:

Colter Steel

Long-term financing equals:

Permanent current assets $2,000,000 Fixed assets $3,200,000 Short-term financing equals:

Temporary current assets $1,000,000

Long-term interest expense = 13% x $3,200,000 = $ 416,000 Short-term interest expense = 8% x 1,000,000 = Total interest expense $ 496,000 Earnings before interest and taxes $ 996,000 Interest expense Earnings before taxes $ 500,000 Taxes (40%) Earnings after taxes $ 300,000 6-9. In problem 8, assume the term structure of interest rates becomes inverted, with short-term

rates going to 11 percent and long-term rates 4 percentage points lower than short-term rates.

If all other factors in the problem remain unchanged, what will earnings after taxes be?

Solution:

Colter Steel (Continued)

Long-term interest expense = 7% x $3,200,000 = $224,000 Short-term interest expense = 11% x 1,000,000 = Total interest expense $334,000

Earnings before interest and taxes $996,000 Interest expense Earnings before taxes $662,000 Taxes (40%) Earnings after taxes $397,200 6-10. Guardian, Inc., is trying to develop an asset-financing plan. The firm has $400,000 in

temporary current assets and $300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

a. Construct two alternative financing plans for Guardian. One of the plans should be

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conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.

b. Given that Guardian’s earnings before interest and taxes are $200,000, calculate

earnings after taxes for each of your alternatives.

c. What would happen if the short- and long-term rates were reversed?

6-10. Continued

Solution:

Guardian, Inc.

a. Temporary current assets Permanent current assets Fixed assets Total assets

Conservative

% of Interest Interest $1,200,000 x .75 = $900,000 x .15 = $135,000 Long-term Total interest charge $165,000

Aggressive

$1,200,000 x .5625 = $675,000 x .15 = $101,250 Long-term Total interest charge $153,750 b. Conservative EBIT $200,000 –Int EBT 35,000 Tax 40% EAT $ 21,000

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$ 400,000

300,000 $1,200,000

Aggressive

$200,000 46,250 $ 27,750

6-10. Continued

c. Reversed:

Conservative

$1,200,000 x .75 = $900,000 x .10 = $90,000 Long-term Total interest charge $135,000

Aggressive

$1,200,000 x .5625 = $675,000 x .10 = $67,500 Long-term Total interest charge $146,250 Reversed Conservative Aggressive EBIT $200,000 $200,000 –Int EBT 65,000 53,750 Tax 40% EAT $ 39,000 $ 32,250 6-11. Lear, Inc., has $800,000 in current assets, $350,000 of which are considered permanent

current assets. In addition, the firm has $600,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with

long-term financing costing 10 percent. Short-term financing currently costs 5 percent. Lear's earnings before interest and taxes are $200,000. Determine Lear's earnings after taxes under this financing plan. The tax rate is 30 percent.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current

assets plus half of its temporary current assets with long-term financing. The same interest rates apply as in part a . Earnings before interest and taxes will be $200,000. What will be Lear's earnings after taxes? The tax rate is 30 percent.

c. What are some of the risks and cost considerations associated with each of these

alternative financing strategies?

6-11. Continued

Solution:

Lear, Inc.

a. Current assets – permanent current assets = temporary current assets $800,000 – $350,000 = $450,000 Short-term interest expense = 5% [$450,000 + ½ ($350,000)] = 5% ($625,000) = $31,250 Long-term interest expense = 10% [$600,000 + ½ ($350,000)] = 10% ($775,000) = $77,500 Total interest expense = $31,250 + $77,500

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= $108,750 Earnings before interest and taxes $200,000 Interest expense Earnings before taxes $ 91,250 Taxes (30%) Earnings after taxes $ 63,875

6-11. Continued

b. Alternative financing plan Short-term interest expense = 5% [½ ($450,000)] = 5% (225,000) = $11,250 Long-term interest expense = 10% [$600,000 + $350,000 + ½ ($450,000)] = 10% ($1,175,000) = $117,500 Total interest expense = $11,250 + $117,500 = $128,750 Earnings before interest and taxes $200,000 Interest Earnings before taxes $ 71,250 Taxes (30%) Earnings after taxes $ 49,875

c. The alternative financing plan which calls for more financing by high-cost debt is more expensive and

reduces aftertax income by $14,000. However, we must not automatically reject this plan because of its higher cost since it has less risk. The alternative provides the firm with long-term capital which at times will be in excess of its needs and invested in marketable securities. It will not be forced to pay higher short-term rates on a large portion of its debt when short-term rates rise and will not be faced with the possibility of no short-term financing for a portion of its permanent current assets when it is time to renew the short-term loan.

6-12. Using the expectations hypothesis theory for the term structure of interest rates, determine

the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6. 1-year T-bill at beginning of year 1 ........................ 6% 1-year T-bill at beginning of year 2 ........................ 7% 1-year T-bill at beginning of year 3 ........................ 9% 1-year T-bill at beginning of year 4 ........................ 11%

Solution:

2 year security (6% + 7%)/2 = 6.5% 3 year security (6% + 7% + 9%)/3 = 7.33%

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4 year security (6% + 7% + 9% + 11%)/4 = 8.25%

6-13. Modern Tombstones has estimated monthly financing requirements for the next six

months as follows:

January . .................................. $20,000 April ................................... $10,000 February . ................................ 6,000 May .................................... 22,000 March . .................................... 8,000 June .................................... 12,000

Short-term financing will be utilized for the next six months. Projected annual interest

rates are:

January . .................................. 9.0% April ................................... 15.0% February . ................................ 8.0% May .................................... 12.0% March . .................................... 12.0% June .................................... 9.0%

a. Compute total dollar interest payments for the six months. To convert an annual rate

to a monthly rate, divide by 12.

b. If long-term financing at 12 percent had been utilized throughout the six months,

would the total-dollar interest payments be larger or smaller?

6-13. Continued

Solution:

Modern Tombstones

Total dollar interest payments would be larger under the long-term financing plan.

6-14. In problem 13, what long-term interest rate would represent a break-even point between

using short-term financing as described in part a and long-term financing? Hint: Divide

the interest payments in 9a by the amount of total funds provided for the six months and

multiply by 12.

Solution:

Divide the total interest payments in part (a) of $705.20 by the total amount of funds extended $78,000 ($20,000 + 6,000 + 8,000 + 10,000 + 22,000 + 12,000) and multiply by 12.

6-15. interest $705. 20==. 904% monthly rate principal $78, 00012 x .904% = 10.848% annual rate Sherwin Paperboard Company expects to sell 600 units in January, 700 units in February,

and 1,200 units in March. January's beginning inventory is 800 units. Expected sales for

the whole year are 12,000 units. Sherwin has decided on a level monthly production

schedule of 1,000 units (12,000 units/12 months = 1,000 units per month). What is the

expected end-of-month inventory for January, February, and March? Show the beginning

inventory, production, and sales for each month to arrive at ending inventory.

Beginning inventory + Production (level) – Sales = Ending inventory

Sherwin Paperboard Company

Solution:

6-16.

Sharpe Computer Graphics Corporation has forecasted the following monthly sales: January . .................................. $80,000 July ..................................... $ 30,000 February . ................................ 70,000 August ................................ 31,000 March . .................................... 10,000 September . .......................... 40,000 April . ...................................... 10,000 October . .............................. 70,000 May . ....................................... 15,000 November . .......................... 90,000 June . ....................................... 20,000 December ........................... 110,000 Total annual sales = $576,000 The firm sells its graphic forms for $5 per unit, and the cost to produce the forms is $2 per

unit. A level production policy is followed. Each month's production is equal to annual

sales (in units) divided by 12.

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Of each month's sales, 30 percent are for cash and 70 percent are on account. All accounts

receivable are collected in the month after the sale is made.

a. Construct a monthly production and inventory schedule in units. Beginning inventory

in January is 15,000 units. (Note: To do part a , you should work in terms of units of

production and units of sales.)

b. Prepare a monthly schedule of cash receipts. Sales in the month of December before

the planning year are $90,000. Work part b using dollars.

c. Determine a cash payments schedule for January through December. The production

costs of $2 per unit are paid for in the month in which they occur. Other cash

payments, besides those for production costs, are $30,000 per month.

d. Prepare a monthly cash budget for January through December. The beginning cash

balance is $5,000 and that is also the minimum desired.

6-16. Continued

Solution:

Sharpe Computer Graphics Corporation

a. Production and inventory schedule in units

1 Total annual sales = $576,000

$576,000/$5 per unit = 115,200 units

115,200 units/12 months = 9,600 per month 2 Monthly dollar sales/$5 price = unit sales

Cash Receipts Schedule

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Cash Payments Schedule

Constant production

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Cash Budget

6-17. Seasonal Products Corporation expects the following monthly sales:

January . ............. $20,000 May .................... $ 1,000 September . ....... $20,000 February . ........... 15,000 June .................... 3,000 October ............ 25,000 March . ............... 5,000 July . .................... 10,000 November ........ 30,000 April . ................. 3,000 August ................ 14,000 December......... 22,000

Total sales = $168,000

Sales are 20 percent for cash in a given month, with the remainder going into accounts

receivable. All 80 percent of the credit sales are collected in the month following the sale.

Seasonal Products uses level production, and average monthly production is equal to

annual production divided by 12.

a. Generate a monthly production and inventory schedule in units. Beginning inventory

in January is 5,000 units. (Note: To do part a , you should work in terms of units of

production and units of sales.)

b. Determine a cash receipts schedule for January through December. Assume that dollar

sales in the prior December were $15,000. Work part b using dollars.

c. Determine a cash payments schedule for January through December. The production

costs ($1 per unit produced) are paid for in the month in which they occur. Other cash

payments, besides those for production costs, are $6,000 per month.

d. Construct a cash budget for January through December. The beginning cash balance is

$1,000, and that is also the required minimum.

e. Determine total current assets for each month. (Note: Accounts receivable equal sales

minus 20 percent of sales for a given month.)

6-17. Continued

Solution:

Seasonal Products Corporation

1 $168,000 sales/$2 price = 84,000 units

84,000 units/12 months = 7,000 units per month 2 Monthly dollar sales/$2 = number of units

6-17. Continued

Cash Receipts Schedule (take dollar values from problem statement)

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6-17. Continued

Cash Payments Schedule

Constant production

6-17. Continued

Cash Budget

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6-17. Continued

The instructor may wish to relate this table to the case budget to show how the buildup in current assets is financed. Also, the table shows how the assets build up from the least liquid current asset (inventory) to the next liquid asset (accounts receivables), and finally by December, the cycle is ready to start over with the flow into the cash balance when the firm eliminates its final loan balance.

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财务管理课后答案第六章

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