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Chapter 3: 1DQ (page 218)
In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
The cash and marketable securities are used to manage the liquid assets and secure the liquidity risk, not generate profits.
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Assume that Hogan Surgical Instruments Co. has \(2,500,000 in assets. If it goes with a low-liquidity plan for the assets, it can earn a return of 18 percent, but with a high-liquidity plan, the return will be 14 percent. If the firm goes with a short-term financing plan, the financing costs on the \)2,500,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $2,500,000 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 with the most aggressive asset financing mix.
b. Compute the anticipated return after financing costs with the most conservative asset financing mix.
c. Compute the anticipated return after financing costs with 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.
Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $150,000 if credit is extended to these new customers. Of the new accounts receivable generated, 5 percent will prove to be uncollectible. Additional collection costs will be 2 percent of sales, and production and selling costs will be 74 percent of sales. The firm is in the 35 percent tax bracket.
c. If the receivable turnover ratio is 3 to 1 and no other asset build-up is needed to serve the new customers, what will Johnson鈥檚 incremental return on new average investment be?
Sharpe Knife Company expects sales next year to be \(1,550,000 if the economy is strong, \)825,000 if the economy is steady, and $550,000 if the economy is weak. Mr. Sharpe believes there is a 30 percent probability the economy will be strong, a 40 percent probability of a steady economy, and a 30 percent probability of a weak economy. What is the expected level of sales for the next year?
What does the term structure of interest rates indicate?
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