Ray now asks you to examine his company's credit policy to determine whether changes are needed. One of his employees, who graduated recently with a finance major, has recommended that the credit terms be changed from 2/10, net 30, to 3/20, net 45, and that both the credit standards and the collection policy be relaxed. According to the employee, such a change would cause sales to increase from $3.6 million to $4.0 million.

Currently, 62.5 percent of SSP's customers pay on Day 10 of the billing cycle and take the discount, 32 percent pay on Day 30, and 5.5 percent pay (on average) on Day 60. If the firm adopts the new credit policy, Ray thinks that 72.5 percent of customers would take the discount, 10 percent would pay on Day 45, and 17.5 percent would pay late, on Day 90. Bad debt losses for both policies are expected to be trivial.

SSP's variable operating costs are currently 75 percent of sales, its cost of funds is 10 percent, and its marginal tax rate is 40 percent. None of these factors would change as a result of a credit policy change. All cash payments associated with the production and sale of products (including credit costs) are made on the day the products are sold.

To help him decide whether to adopt the new policy, Ray has asked you to answer the question below.

What is the dollar amount of discounts granted under the current and the proposed credit policies?

What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What factors should a firm consider in building its marketable securities portfolio? What are some securities that should be held and some that should not be held?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

Why would a firm hold marketable securities?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

How can a firm speed up collections and slow down disbursements?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

You have been going through the store's checkbook and bank balances. In the process, you discovered that SSP, on average, writes checks in the amount of $10,000 each day and that it takes approximately five days for these checks to clear. Also, the firm receives checks in the amount of $10,000 daily, but loses four days while they are being deposited and cleared. What is the firm's disbursement float, collections float, and net float?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

How can a firm synchronize its cash flows, and what good would this effort do?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What are some specific advantages for a firm in holding adequate cash balances?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What is meant by the terms precautionary balance and speculative balance?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

For what reasons do firms hold cash?

Ray Smith, a retired librarian, recently opened an outdoor recreation shop called Smitty's Sports Paradise (SSP). Ray decided that, at age 62, he wasn't quite ready to stay at home living the life of leisure. It had always been his dream to open an outdoor recreation shop, so his friends convinced him to do it. Because Ray's educational background was in literature and not in business, he hired you, a finance expert, to help him with the store's cash management. Ray is very eager to learn, so he has asked you to develop a set of questions to help him understand cash management. Answer the question below.

What is the goal of cash management?

The UFSU Corporation intends to borrow $450,000 to support its short-term financing requirements during the next year. The company is evaluating its financing options at the bank where it maintains its checking account. UFSU's checking account balance, which averages $50,000, can be used to help satisfy any compensating balance requirements the bank might impose. The financing alternatives offered by the bank include the following:

Alternative 1: A discount interest loan with a simple interest of 9 1/4 percent and no compensating balance requirement.

Alternative 2: A 10 percent simple interest loan that has a 15 percent compensating balance requirement.

Alternative 3: A $1 million revolving line of credit with simple interest of 9 1/4 percent paid on the amount borrowed and a 1/4 percent commitment fee on the unused balance. No compensating balance is required.

For each alternative, how much would UFSU have to borrow to have$450,000 available for use (to pay the firms bills)?

The UFSU Corporation intends to borrow $450,000 to support its short-term financing requirements during the next year. The company is evaluating its financing options at the bank where it maintains its checking account. UFSU's checking account balance, which averages $50,000, can be used to help satisfy any compensating balance requirements the bank might impose. The financing alternatives offered by the bank include the following:

Alternative 1: A discount interest loan with a simple interest of 9 1/4 percent and no compensating balance requirement.

Alternative 2: A 10 percent simple interest loan that has a 15 percent compensating balance requirement.

Alternative 3: A $1 million revolving line of credit with simple interest of 9 1/4 percent paid on the amount borrowed and a 1/4 percent commitment fee on the unused balance. No compensating balance is required.

Compute the effective cost (rate) of each financing alternative assuming UFSU borrows $450,000. Which alternative should UFSU use?

The Meyer Company must arrange financing for its working capital requirements for the coming year. Meyer can (a) borrow from its bank on a simple interest basis (interest payable at the end of the loan) for one year at a 12 percent simple rate; (b) borrow on a three-month, renewable loan at an 11.5 percent simple rate; or (c) obtain the needed funds by no longer taking discounts and thus increasing its accounts payable. Meyer buys on terms of 1/ 15, net 51 . What is the EAR of the least expensive type of credit, assuming 360 days per year? Meyer's account currently has a $0 balance.