Week 9 Homework Submission

• PROBLEMS

1. Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstand-ing an average of thirty- five days, and the firm receives forty days of credit on its purchases from suppliers. a. Estimate the average length of the firm’s short- term operat-ing cycle. How often would the cycle turn over in a year? b. Assume net sales of $ 1,200,000 and cost of goods sold of $ 900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?

3. Obtain a current issue of the Federal Reserve Bulletin, or review a copy from the Fed’s Web site ( http:// www. federalreserve. gov) or the St. Louis Fed’s Web site ( http:// www. stlouisfed. org), and determine the changes in the prime rate that have occurred since the end of 2000. Comment on any trends in the data.

 4. Compute the effective cost of not taking the cash discount under the following trade credit terms:

a. 2/ 10 net 40

b. 2/ 10 net 50

c. 3/ 10 net 50

d. 2/ 20 net 40

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Week 10 Homework Submission

• PROBLEMS

  1. Suppose the Quick Towing Company purchases a new tow truck. The old truck had a book value of $ 1,000 and was sold for $ 1,420. If Quick Towing is in the 34 percent marginal tax bracket, what is the tax liability on the sale of the truck? What is the after- tax cash flow on the sale? 2. Hammond’s Fish Market just purchased a $ 30,000 fork lift truck. It has a five- year useful life. The firm’s tax rate is 25 percent.

  a. If the fork lift is straight- line depreciated, what is the firm’s tax savings from depreciation?

  b. What will be its book value at the end of year three?

  c. Suppose the fork- lift can be sold for $ 10,000 at the end of three years. What is its after- tax salvage value?

   

  7. The No- Shoplift Security Company is interested in bidding on a contract to provide a new security system for a large department store chain. The new security system would be phased into 10 stores per year for five years. No- Shoplift can purchase the hardware for $ 50,000 per installation. The labor and material cost per installation is approximately $ 15,000. In addition, No- Shoplift will need to purchase $ 100,000 in new equipment for the installation, which will be depreciated to zero using the straight- line method over five years. This equipment will be sold in five years for $ 25,000. Finally, an investment of $ 50,000 in net working capital will be needed. Assume that the relevant tax rate is 34 percent. If the No- Shoplift Security Company requires a 10 percent return on its investments, what price should it bid?

   

   

  18. Using the income statements from the Mount Lewis Copy Centers for 2010 and 2011 in Problem 17, find the percentage change in sales, EBIT, and net income. Use them to compute the degree of operating leverage, financial leverage, and combined leverage.