Working Capital Questions

Chapter 6, Problem 14

Guardian Inc. is trying to develop an asset-financing plan. The firm has \$400,000 in temporary current assets and \$300,000 in permanent current assets. Guardian also has \$500,000 in fixed assets. Assume a tax rate of 40 percent.

a.       Construct two alternative financing plans for Guardian. One of the plans should be conservative, with 75 percent of assets financed by long-term sources, and the other should be aggressive, with only 56.25 percent of assets financed by long-term sources. The current interest rate is 15 percent on long-term funds and 10 percent on short-term financing.

b.      Given that Guardian’s earnings before interest and taxes are \$200,000, calculate earnings after taxes for each of your alternatives.

c.       What would happen if the short- and long-term rates were reversed?

Chapter 7, Problem 5

Thompson Wood Products has credit sales of \$2,160,000 and accounts receivable of \$288,000. Compute the value of the average collection period.

Chapter 7, Problem 13

Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \$8 per order, and carrying costs of \$1.60 per unit.

a.            What is the economic ordering quantity?

b.            How many orders will be placed during the year?

c.             What will the average inventory be? d.  What is the total cost of ordering and carrying inventory?

Chapter 8, Problem 18

8. If you borrow \$5,300 at \$400 interest for one year, what is your effective interest rate for the following payment plans?

a.            Annual payment.

b.            Semiannual payments.

c.             Quarterly payments.

d.            Monthly