Lancaster Lumber buys $8 million of materials (net of discounts) on terms of 3/5, net 55; and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9%, interest paid monthly, based on a 365-day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? Explain.

Answer the following.

Lancaster Lumber buys 8 million dollars of materials (net of discounts) on terms of 3 / 5, net 55, and it currently pays on the 5th day and takes discounts. Lancaster plans to expand, which will require additional financing. If Lancaster decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of 9 percent, interest paid monthly, based on a 365 -day year, what would be the effective cost of the bank loan? Should Lancaster use bank debt or additional trade credit? Explain.

McEwan Industries sells on terms of 3/10, net 30. Total sales for the year are $1,921,000; 40% of the customers pay on the 10th day and take discounts, while the other 60% pay, on average, 70 days after their purchases. a. What is the days sales outstanding? b. What is the average amount of receivables? c. What is the percentage cost of trade credit to customers who take the discount? d. What is the percentage cost of trade credit to customers who do not take the discount and pay in 70 days? e. What would happen to McEwan’s accounts receivable if it toughened up on its collection policy with the result that all nondiscount customers paid on the 30th day?

Lamar Lumber buys $\$ 8$ million of materials (net of discounts) on terms of $3 / 5$, net $60$ ; and it currently pays on the $5^{\text {th }}$ day and takes discounts. Lamar plans to expand, which will require additional financing. If Lamar decides to forgo discounts, how much additional credit could it obtain, and what would be the nominal and effective cost of that credit? If the company could get the funds from a bank at a rate of $10 \%$, interest paid monthly, based on a $365$ -day year, what would be the effective cost of the bank loan? Should Lamar use bank debt or additional trade credit? Explain.

Zocco Corporation has an inventory conversion period of $75$ days, an average collection period of $38$ days, and a payables deferral period of $30$ days.

a. What is the length of the cash conversion cycle?

b. If Zocco's annual sales are $\$ 3,421,875$ and all sales are on credit, what is the investment in accounts receivable?

c. How many times per year does Zocco turn over its inventory? Assume that the cost of goods sold is $75 \%$ of sales.

Zane Corporation has an inventory conversion period of 64 days, an average collection period of 28 days, and a payables deferral period of 41 days. a. What is the length of the cash conversion cycle? b. If Zane’s annual sales are $2,578,235 and all sales are on credit, what is the investment in accounts receivable? c. How many times per year does Zane turn over its inventory? Assume that the cost of goods sold is 75% of sales. Use sales in the numerator to calculate the turnover ratio.

Lamar Lumber Company has sales of $\$ 10$ million per year, all on credit terms calling for payment within $30$ days, and its accounts receivable are $\$ 2$ million. What is Lamar's DSO, what would it be if all customers paid on time, and how much capital would be released if Lamar could take action that led to on-time payments?

Indicate using a (+), (–), or (0) whether each of the following events would probably cause accounts receivable (A/R), sales, and profits to increase, decrease, or be affected in an indeterminate manner:

$$\begin{matrix} \text{ } & \text{A/R} & \text{Sales} & \text{Profits}\\ \text{The firm restricts its credit standards.}\\ \text{The terms of trade are changed from 2/10, net 30, to 3/10, net 30.}\\ \text{The terms are changed from 1/20, net 30, to 3/10, net 40.}\\ \text{The credit manager gets tough with past-due accounts.}\\ \end{matrix}$$

Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017.

$$\begin{matrix} \text{May 2016} & \text{\$ 180.000}\\ \text{June} & \text{180.000}\\ \text{July} & \text{360.000}\\ \text{August} & \text{540.000}\\ \text{September} & \text{720.000}\\ \text{October} & \text{360.000}\\ \text{November} & \text{360.000}\\ \text{December} & \text{90.000}\\ \text{January 2017} & \text{180.000}\\ \end{matrix}$$

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

$$\begin{matrix} \text{May 2016} & \text{\$ 90.000}\\ \text{June} & \text{90.000}\\ \text{July} & \text{126.000}\\ \text{August} & \text{882.000}\\ \text{September} & \text{306.000}\\ \text{October} & \text{234.000}\\ \text{November} & \text{162.000}\\ \text{December} & \text{90.000}\\ \end{matrix}$$

General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are$9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are$2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of$180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of$90,000 should be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2016. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects. d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.

Rentz Corporation is investigating the optimal level of current assets for the coming year. Management expects sales to increase to approximately $2 million as a result of an asset expansion presently being undertaken. Fixed assets total$1 million, and the firm plans to maintain a 60% debt-to-assets ratio. Rentz’s interest rate is currently 8% on both short- and long-term debt (which the firm uses in its permanent structure). Three alternatives regarding the projected current assets level are under consideration: (1) a restricted policy where current assets would be only 45% of projected sales, (2) a moderate policy where current assets would be 50% of sales, and (3) a relaxed policy where current assets would be 60% of sales. Earnings before interest and taxes should be 12% of total sales, and the federal-plus-state tax rate is 40%. a. What is the expected return on equity under each current assets level? b. In this problem, we assume that expected sales are independent of the current assets investment policy. Is this a valid assumption? Why or why not? c. How would the firm’s risk be affected by the different policies?

find the domain, x-intercept, and vertical asymptote of the logarithmic function and sketch its graph. g(x) = ln(-x)

Define the cash conversion cycle (CCC) and explain why, holding other things constant, a firm’s profitability would increase if it lowered its CCC.

Welch Company is considering three independent projects, each of which requires a $\$ 5$ million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented here:

$$\begin{array}{lll}\text { Project } \mathrm{H} \text { (high risk): } & \text { Cost of capital }=16 \% & \text { IRR }=20 \% \\ \text { Project } \mathrm{M} \text { (medium risk): } & \text { Cost of capital }=12 \% & \text { IRR }=10 \% \\ \text { Project L (low risk): } & \text { Cost of capital }=8 \% & \text { IRR }=9 \%\end{array}$$

Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for $50 \%$ debt and $50 \%$ common equity, and it expects to have net income of $\$ 7,287,500$. If Welch establishes its dividends from the residual dividend model, what will be its payout ratio?

Answer the following.

Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of 7 dollars per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days.

a. What is the length of Pasha's cash conversion cycle?

b. At a steady state in which Pasha produces 1,400 batteries a day, what amount of working capital must it finance?

c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days?

d. Pasha's management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of materials and labor to increase to 12 dollars. Assuming the change does not affect the average collection period (40 days) or the payables deferral period (30 days), what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?