Questions:

Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47.  The firm’s straight bonds yield 10%.  Each warrant is expected to have a market value of $2.00 given that the stock sells for $42.  What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

(The following data apply to the next four problems

The following data apply to Neuman Corporation’s convertible bonds:

Maturity:           10        Stock price:      $30.00

Par value:         $1,000.00        Conversion price:          $35.00

Annual coupon: 5.00%  Straight-debt yield:        8.00%

What is the bond’s conversion ratio?

What is the bond’s conversion value?

What is the bond’s straight-debt value?

Based on your answers to the three preceding questions, what is the minimum price (or “floor” price) at which the Neuman’s bonds should sell?

Frosty Corporation has the following data, in thousands.  Assuming a 365-day year, what is the firm’s cash conversion cycle?

Annual sales =  $45,000

Annual cost of goods sold =      $31,500

Inventory =       $4,000

Accounts receivable =  $2,000

Accounts payable =      $2,400

Freeman Builders, Inc. buys on terms of 2/15, net 30.  It does not take discounts, and it typically pays 60 days after the invoice date.  Net purchases amount to $720,000 per year.  What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year.  What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier’s credit terms?  (Assume a 365-day year.)

Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit by not taking discounts on its purchases.  The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time.  The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts.  The firm wants to determine the effect of this policy change on its net income.  Its net purchases are $11,760 per day, using a 365-day year.  The interest rate on the notes payable is 10%, and the tax rate is 40%.  If the firm implements the plan, what is the expected change in net income?

Famous Farm’s DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million.  What is the inventory turnover ratio?

Harris Flooring Inc. is planning to borrow $12,000 from the bank for new sanding machines.  The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.  What is the effective rate of interest on the 12 percent discounted loan?

Sunnydale Organics, Inc. harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment.  Due in part to the firm’s rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.  If the firm requires $60,000 in proceeds from each note, what must be the face value of each note?

(The following information applies to the next three problems.)

Reese Brothers Publishers Inc (RBP) expects to have sales this year of $15 million under its current credit policy.  The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days.  This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days.  Expected bad debt losses on the remaining sales would fall to 3 percent.  The variable cost percentage is 60 percent, and the cost of capital is 15 percent.

What would be the incremental bad losses if the change were made?

What would be the incremental cost of carrying receivables if this change were made?

What are the incremental pre-tax profits from this proposal?

The following information applies to the next three problems.)

Assume that Palmer Executive Pens uses 1,440,000 gallons of ink each year. Further, assume that Palmer can order the ink at a cost of $2 per gallon plus fixed ordering costs of $100 per order.  The firm’s carrying cost is 20 percent of the inventory value, at cost.

What is the firm’s EOQ?

What is Palmer’s minimum costs of ordering and holding inventory?

Now, suppose the manufacturer offers a discount of 0.5 percent for orders of a least 40,000 gallons.  Should Palmer increase its ordering quantity to take the discount? What will be net saving or loss from taking the discount?

Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?

Humphrey’s Housing has been practicing cash management for some time by using the Baumol model for determining cash balances.  Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent.  A rapid increase in interest rates has driven the interest rate up to 9 percent.  What is the appropriate average cash balance now?

APA

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