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Chapter 3: 9DQ (page 182)
What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
There are three theories for describing the yield curve鈥檚 shape, expectations theory, liquidity-preference, and hedging pressure theories.
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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.
Wisconsin Snowmobile Corp. is considering a switch to level production. Cost efficiencies would occur under level production, and after-tax costs would decline by \(36,000, but inventory would increase by \)300,000. Wisconsin Snowmobile would have to finance the extra inventory at a cost of 13.5 percent.
b. How low would interest rates need to fall before level production would be feasible?
Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.
e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?
Regis Clothiers can borrow from its bank at 17 percent to take a cash discount. The terms of the cash discount are 3/19, net 45. Should the firm borrow the funds?
Global Services is considering a promotional campaign that will increase annual credit sales by \(450,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:
Accounts receivable | 2X |
Inventory | 6X |
Plant and equipment | 1X |
All \)450,000 of the sales will be collectible. However, collection costs will be 6 percent of sales, and production and selling costs will be 71 percent of sales. The cost to carry inventory will be 4 percent of inventory. Depreciation expense on plant and equipment will be 5 percent of plant and equipment. The tax rate is 30 percent.
a. Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.
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