Complete

CHAPTER 3
THE TIME VALUE OF MONEY

Basic Terms
n
= Number of years.
r, i = Interest rate.
Fv = Future Value.
Pv = Present Value.
FVA = Future value annuity.
PVA = Present value annuity.
Formulas
1.
Fv = Pv (1 + i) n
2.
Pv = Fv (1 + i) - n
3.
FVA = A
4.
5.
6.
7.
(1 + i) n 1
r
1
1
PVA = A
(1+ r) n
r
Fv = Pv [1 + r ] m n
m
Pv = Fv
[1 + r ] m n
m
FVA =A (1 + i) n 1
r
8.
Fv = Pv e
9.
Pv = Fv
e rn
rn
(1 + r)
Future Value Annuity Due
Future Continuous
Present Continuous
Question Number 1
1. (a)
Given Data:n = 3 years.
Pv = $100
Fv = ?
i = 100%, 10%, 0%.
Formula:-
Fv = Pv (1 + i) n
Solution:
i.
100%
Fv = Pv (1 + i) n
= 100 (1 + 1)3
= 100 (2)3 = 100 (8)
ii.
= $800.
10%
Fv = Pv (1 + i) n
= 100 (1 + 0.1)3
= 100 (1.1)3
iii.
= 100 (1.33)
0%
Fv = Pv (1 + i) n
= 100 (1 + 0)3
= 100 (1)3 = $100.
= $133.
1. (b)
Pv = $500
A = $100
Total Fv = ?
i = 100%, 5%, 0%.
Formula: -
Fv = Pv (1 + i) n,
FVA = A [ (1 + i) n 1 ]
r
Solution:
i.
10%
Fv = Pv (1 + i) n
= 500 (1 + 0.1)5
= 500 (1.1)5
= 500 (1.61)
= $805.
FVA = A [(1 + i) n 1]
r
= 100 [(1 + 0.1) 5 1]
0.1
5
= 100 [(1.1) 1] = 100[1.61 1]
= $610.
0.1
0.1
Total Fv = Fv + FVA
= $805 + $610 = $1415.
ii.
5%
Fv = Pv (1 + i) n
= 500 (1 + 0.05)5
= 500 (1.05)5
= 500 (1.28)
FVA = A [(1 + i) n 1]
r
= 100 [(1 + 0.05) 5 1]
0.1
= $638.
= 100 [(1.05)5 1] = 100[1.28 1]

= $553.
0.1
0.1
Total Fv = Fv + FVA
= $638+ $553= $1193.
iii.
0%
Fv = Pv (1 + i) n
= 100 (1 + 0)5
= 100 (1)5 = $100.
FVA = A [(1 + i) n 1]
r
= 100 [(1 + 0) 5 1]
0.1
= 100 [(1)5 1] = 100[1 1]
0.1
= $0.
0.1
Total Fv = Fv + FVA
= $100 + $0 = $100.
1. (c) Same as 1. (b)
1. (d)
Pv = $100
r = 100%, 5%, 0%.
Fv = ?
Formula: -
Fv = Pv [1 + r ] m n
m
Solution:
i.
100%
Fv = Pv [1 + r ] m n
m
= 100 [1 + 1] 4(3)
4
= $1455
ii.
=100 [1 + 0.25] 12
10%
Fv = Pv [1 + r ] m n
m
= 100 [1 + 1] 4(3)
=100 [1 + 0.025] 12
= 100 [1.25]12
4
=100 [1.025]
iii.
= $134
12
0%
Fv = Pv [1 + r ] m n
m
= 100 [1 + 0] 4(3)
4
12
=100 [1]
=100 [1 +0] 12
= $100
1. (e)
View.
In part 1.(a) the interest is paid only once in the year whereas
in part 1.(d) the interest is paid monthly thats why the
result
differ from each other.
1. (f)
Pv = $100
Fv = ?
r = 10%
m = 1, 2, 4, e
Formula: - Fv = Pv [1 + r ] m n
m
Solution:
Annually
(m = 1)
Quarterly
(m = 4)
Fv
Fv
Semi quarterly
(m = 2)
= Pv [1 + r ] m n
m
= 100 [1 + 0.1] 1(10)
1
= $259.4
= Pv [1 + r ] m n
m
= 100 [1 + 0.1] 4(10)
Fv
=100 [1.1] 10
=100 [1 +0.025] 40
4
= $259
= Pv [1 + r ] m n
m
= 100 [1 + 0.1] 2(10)
= 100 [1 +0.05]
2
= $265
Continuously Fv
= Pv e
rn
= 100 e 0.1 (10) = 100 e 1

= $272
= 100 (2.72)
20
Question Number 2
2. (a)
Fv = $100
Pv = ?
r = 100%, 10%, 0%
Formula: - Pv = Fv (1 + i) - n
Solution:
i.
100%
Pv
= Fv (1 + i) - n
= 100 (1 + 1) -3
= 100 (2) -3
= $12.5
ii.
10%
Pv
= Fv (1 + i) - n
= 100 (1 + 0.1) -3
= 100 (1.1) -3
= $75.13
iii.
0%
Pv
= Fv (1 + i) - n
= 100 (1 + 0) -3
= $100
= 100 (1) -3
2.(b)
Fv = $500
Pv = ?
r = 4%, 25%
Formula: - Pv = Fv
[1 + r ] m n
m
Solution:
i.
4%, 1st Year Pv = 500
[1 + 0.04] 1(3)
1
= 500
[1.04] 3
2nd Year
3rd Year
Pv = 500
[1 + 0.04] 2(3)
2
= 500
[1.02] 6
Pv = 500
[1 + 0.04] 3(3)
3
= 500
= $444
= 500
= $442
= 500
1.13
$443.66
[1.013] 9
ii.
1.127
25%, 1st Year Pv = 500

[1 + 0.25] 1(3)
1
= 500
[1.25] 3
2nd Year
3rd Year
= $256.4
Pv = 500
[1 + 0.25] 2(3)
2
= 500
[1.125] 6
2.028
Pv = 500
[1 + 0.25] 3(3)
3
= 500
[1+ 0.083] 9
= 500
(1.083)9
= 500
= $247
= 500
2.056
n
Fv
Pv at r = 4%
Pv at r = 25%
Year 1
$500
$444
$256.4
End of theYear
Year 2
$500
$442
$247
= $243
Year 3
$500
$443.66
$243
$1329.66
$746.4
2.(c)
Fv = $100, $500, $1000.
Pv = ?
r = 4%, 25%
Formula: - Pv = Fv
[1 + r ] m n
m
Solution:
i.
4%, 1st Year Pv = 100
[1 + 0.04] 1(3)
1
= 100
[1.04] 3
2nd Year
3rd Year
= $88.5
Pv = 500
[1 + 0.04] 2(3)
2
= 500
[1.02] 6
Pv = 1000
[1 + 0.04] 3(3)
3
= 1000
[1.013] 9
= 500
1.13
= 1000
1.127
= $887.31
ii.
25%, 1st Year Pv = 100

[1 + 0.25] 1(3)
1
= 100
[1.25] 3
= $51.28
= $442
2nd Year
Pv = 500
[1 + 0.25] 2(3)
2
=
500
= 500
= $247
n
Fv
Pv at r = 4%
Pv at r = 25%
Year 1
$100
$88.5
$51.28
3rd Year
[1.125] 6
End of theYear
Year 2
$500
$442
$247
2.028
Year 3
$1000
$887.31
$486.4
Pv = 1000
[1 + 0.25] 3(3)
3
= 1000
[1+ 0.083] 9
= 1000
(1.083)9
= 1000
= $486.4
2.056
2.(d)
Same as 2.(b)
Question Number 3
Given Data:Pv = $ 25,000
n = 12
r = 6%
A=?
Formula:-
PVA = A [
1
(1+ r) n ]
1
r
Solution:
125000 = A [
1
(1 + 0.06) 12]
0.06
1
(1.06) 12]
125000 = A [
0.06
1-
$1417.81
$784.68
25000 = A [
25000 = A [
25000 = A [
A = 25000
8.38
2.013]
0.06
1 0.497]
0.06
0.50]
0.06
= $2983.4
Question Number 4
Given Data:Fv = $ 50,000
n = 10
r = 8%
A=?
Formula:-
FVA = A [(1 + r) n - 1]
r
Solution:
50000 = A [(1 + 0.08) 10 - 1]

0.08
50000 = A [(1.08) 10 - 1]
0.08
50000 = A [2.16 - 1]
0.08
50000 = A [1.159]
0.08
50000 = A (14.5)
A = 50000
14.5
= $3448.
Question Number 5
Given Data:Fv = $ 50,000
n = 10
r = 8%
A = ? (Future value annuity due)
Formula:-
Solution:
FVA = A [(1 + r) n - 1] (1 + r)
r
50000 = A [(1 + 0.08) 10 - 1] (1 + 0.08)
0.08
50000 = A [(1.08) 10 - 1] (1.08)
0.08
50000 = A [2.16 - 1] (1.08)
0.08
50000 = A [1.159] (1.08)
0.08
50000 = A (14.5) (1.08)
A = 50000
15.66
= $3192.8
Question Number 6
Pv = $10,000
Fv = $16,000
r=?
Formula: -
Fv = Pv (1 + r) n
Solution: -
(Fv) 1/ n = (Pv)1/ n (1 + r) n. 1/ n
(Fv) 1/ n = (Pv)1/ n (1 + r)
(16000) 1/ 3 = (10000)1/ 3 (1 + r)
25.198 = 21.54 (1 + r)
25.198 = 21.54 + 21.54 r
25.198 21.54 = 21.54r
3.65 = 21.54 r
r = 3.65
21.54
r = 17 %
= 0.17 (100)
Question Number 8
Pv = $500,000
r = 20
A=?
Formula:-
PVA = A [
1
(1+ r) n ]
1
r
Solution:
11
500000 = A [ (1 + 0.2) 6]
0.2
11
500000 = A [ (1.2) 6]
0.2
11
500000 = A [ 2.986]
0.2
500000 = A [1 0.335]
0.2
500000 = A [0.665]
0.2
A = 500000
= $15037.59
0.2
Question Number 10
Pv = ?
Fv = $100
r = 10%
m = 1, 4, e
Formula: - Pv = Fv
[1 + r ] m n
m
Pv = Fv
e rn
Solution:
Annually
(m =1)
Pv =
Fv
[1 + r ] m n
m
Pv = 100
[1 + 0.1] 1(10)
1
= 100
[1.01] 10
= 100
= $38.46
= 1000
= $486.4
2.6
2.056
Quarterly
(m =4)
Pv =
Fv
[1 + r ] m n
m
Pv = 100
[1 + 0.1] 4(10)
4
= 100
[1.025] 40
= 100
= $37.17
2.69
Continuously Pv = Fv
e rn
Pv = 100
e 0.1(10)
= $36.76
= 100
e1
= 100
2.72
Question Number 11
Pv = $1000
Fv = $1 Million
r=?
Formula: -
Fv = Pv (1 + r) n
Solution: -
(Fv) 1/ n = (Pv)1/ n (1 + r) n. 1/ n
(Fv) 1/ n = (Pv)1/ n (1 + r)
(1000,000) 1/ 100 = (1000)1/ 100 (1 + r)
1.148 = 1.072 (1 + r)
1.148 = 1.072 + 1.072 r
1.148 1.072 = 1.072 r
0.408 = 1.072 r
r = 0.408
1.072
r = 38 %
= 0.380 (100)
Question Number 12
Pv = ?
A= $10,000
r = 5%
Formula:-
PVA = A [
1
(1+ r) n ]
1
r
12.(a)
Solution:
PVA= 10,000 [
1(1 + 0.05) 15]
1
0.05
PVA= 10,000 [
PVA= 10,000[
1 1
(1.05) 15]
0.05
1 2.08]
0.05
PVA= 10,000[1 0.481]

0.05
PVA= 10,000[0.519]
0.05
PVA = 5192.31
0.05
PVA = $103846.2
12.(b)
Pv = ?
A= $10,000
r = 10%
Formula:-
PVA = A [
1
(1+ r) n ]
1
r
Solution:
11
(1 + 0.1) 15]
0.1
1 PVA= 10,000 [
(1.1) 15]
0.1
1 PVA= 10,000[ 4.17]
0.1
PVA= 10,000 [
PVA= 10,000[1 0.239]

0.1
PVA= 10,000[0.760]
0.1
PVA = 7601.9
0.1
PVA = $7601.9
12.(c)
Pv = $30,000
A= ?
r = 5%, 10%
Formula:-
1
(1+ r) n ]
PVA = A [
1
r
Solution:
i.
r = 5%
11
15
30,000 = A [ (1 + 0.05) ]
0.05
130,000 = A [ (2.08)]
0.05
30,000 = A [1 0.481]
0.05
30,000 = A [0.519]
0.05
30,000 = A [10.38]
A = 30,000
10.38
= $2890.17
Solution:
ii.
r = 10%
11
15
30,000 = A [ (1 + 0.1) ]
0.1
130,000 = A [ (1.1)15]
0.1
130,000 = A [ (4.17)]
0.1
30,000 = A [1 0.239]
0.1
30,000 = A [0.760]
0.1
30,000 = A [7.60]
A = 30,000
7.60
= $3947.37
Question No 13
Pv = $190,000
A= ?
r = 17%
1Formula:-
PVA = A [
Solution:
11
20
190,000 = A [ (1 + 0.17) ]
0.1
1190,000 = A [ (1.17)20]
0.1
(1+ r) n ]
r
1 1
190,000 = A [ (23.11)]
0.1
190,000 = A [1 - 0.0433]
0.1
190,000 = A [0.957]
0.1
190,000 = A [9.567]
A = 190,000
9.567
= $19859.94
CHAPTER 6
FINANCIAL STATEMENT ANALYSIS
Problem 1
Solution:
A Coy
E Coy
1.25
2.0
1.333
2.0
0.07
0.1
0.1
0.1
0.0875
0.2
0.1333
0.2
0.058
Earning power (ROI)

0.375
D Coy
2.125
Net profit margin

0.125
C Coy
F Coy
Total asset turnover

3.0
Companies
B Coy
0.125
Where,
Total Asset Turnover = Net Sales/ Total Assets
Net Profit Margin = Net Profit + After Taxes (Net Profit)
Net Sales
Earning power or return on investment (ROI) = Net Profit Margin x Total
Assets Turnover
Problem 2
Solution :
a.
b.
c.
Sales
Current Ratio = Current Assets

Current Liabilities
= $3800/$1680
= 2.26
Asid Test Ratio = Current Assets Inventories/ Current Liabilities
= $3800 - $2100/ $1680
= 1.01
Average Collection Period = Receivables x 360 Days/ Annual Net Credit
= $1300 x 360/ 12680 = 36.9 = 37 Days

d.
Inventory Turnover Ratio = Cost of Good Sold/ Inventory
= $8930/$2100 = 4.25
e.
Debt to Net Worth Ratio = Account Payable + Acct+ Short Term Loans
+Long Term Loans
Total Assets [(Total Liabilities+ Net Worth)
(Net Worth)]
= $1680 + $2000
= 1.07
$7120-[7120-3440]
f.
Long Term Debt to Total Capitalization Ratio = Long Term Debt/ Total
Capitalization
= Long Term Debt/ LT Debt +
Net Worth
= $2000/$2000 + $3440 = 0.37
g.
Gross Profit Margin = Gross Profit / Net Sales or
= [1- Cost of Good Sold] x Net Sale
= 3750/12680 = 0.30
h.
Net Profit Margin = Net Profit after Taxes/ Net Sales
= $670/$12680 = 0.053
i.
Return on Equity = Net Profit after Taxes/ Shareholders Equity
= $670/$3440
= 0.20
Problem 3
Solution
a.The return on investment decline because the total assets turnover decline and the
net profit margin decline. Apparently sales did not keep up worth assets expansion
or sales decrease while assets did not in either case the fixed cost would comm.
Larger of sale dollar causing profitability on sales top decrease. The lower
profitability on sales and lower assets resulted in lower return on investment.
b.The increase in debt came from short term resources. Current assets increased
relative to sales as is indicated by inventory turnover and collection period. The
current ratio and the acid test ratio however decrease. This indicate that the
substantial increase in current liabilities.
Problem 4
Solution
a.
Net Profit Margin = Profit after Taxes/ Sales

Profit after Taxes = Sales X Net Profit Margin
= $800 x 7%
b.
=$560
Profit after Taxes = Profit after Taxes/ (1- T)

= $560/ (1-44%) = $1000
Taxes = PBT PAT =
c.
$1000 - $560 = $440
Total Liabilities = Share Holder Equity x (Total Liabilities/Shareholders
Equity)
= $3750 x (1/1)
= $3750
d.
Total Liabilities and Owners Equity = $3750 + $3750
e.
Current Liabilities = Total Liabilities Long Term Liabilities

= $7500 - $2650
f.
= $1100
Bank Loan = Current Liabilities Payables Accrual

= $1100 - $400 - $200
g.
= $7500
= $500
Total Assets = Total Liabilities Shareholders Equity

(As we know from the accounting equation of a balance sheet)
Total Assets = $3750 + $3750 = $7500
h.
Current Assets = Current Liabilities x Current Ratio

= $1100 x 3 = $3300
i.
Net Fixed Assets = Total Assets Current Assets

= $7500 - $3300 = $4200
j.
Account Receivable = Annual Credit Sales x Average Collection Period/ 360
Days
= $8000 x 45 Days/ 360 Days
k.
Inventory = Current Assets Cash Receivable

= $3330 - $500 - $1000
l.
= $1800
Cost of Good Sold = Inventory x Inventory Turnover Ratio

= $1800 x 3
m.
= $1000
= $5400
Gross Profit = Sales Cost of Good Sold

= $8000 - $5400= $2600
n.
Selling And Adm Expense = Gross Profit Interest Expense Profit Before
Taxes
= $2600 - $400 - $1000
= $1200
Vaneir Corporation
Balance Sheet
Dec 31, 2006
Asserts
Cash & marketable Securities
Account receivable
Inventories
Current assets
$500
1000
1800
$33000
Net fixed assets
4200
Total assets
$7500
Liabilities & Owners Equity

Account Payable
$400
Bank loan
500
Accruals
200
Current liabilities
$1100
Long term debt
2650
Common stock & retained
3750
earnings
Total Liabilities & Equity
$7500
Income statement for 2006 (In Thousands)

Credit sales
$8000
Cost of good sold
5400
Gross profit
$2600
Selling & administrative expense
1200
Interest expense
400
Profit before taxes

Taxes (44%)
Profit after taxes
$1000
440
$560
Problem 5
Given Data:
Total annual sales = $400,000
Gross profit margin = 20%
Current assets = $80,000
Inventories = $30,000
Cash = $10,000
Inventory turnover = 4
Account receivable = $50,000
Requirements:
a.
Average inventory =?
b.
Average collection period=?
Solution
a.
Cost of Good Sold = (1 Gross Profit) x Net Sales
= (1 20%) x 400,000 = $320,000
Inventory Turnover = Cost of Good Sold/ Average Inventory
Average Inventory = Cost of Good Sold/ Inventory Turnover
= $320,000/4
b.
= $80,000
Average Collection Period = Account Receivable x 360 Days/ Annual Credit
Sales
= $50,000 x 360/$400,000
Problem 6
= 45 Days
Stoney Mason
Given Data:
Sales = $6 million
Total Assets Turnover Ratio = 6
Net profit = $120,000
Requirements:
Solution:
a.
Company Return on Assets or Earning Power=?
b.
Effect of New Equipment or Earning Power=?
a.
Earning Power or ROI = [Net Profit after Taxes/ Net Sales] x Total Assets
Turnover
= [120,000/600,0000] x 6 = 0.12 = 12%
b.
Net Profit Margin = 3

Total Assets = Net Sales/ Total Assets Turnover
= $6 million/6
= $1 million
Earning power or ROI = Net Profit Margin x Total Assets Turnover (20%)
Earning Power or ROI = 3% x [$ 6 Million/ {$1Million x ($6Million
20%)}]
= 3% x [$6Million/ {$1Million x $1.2Million}]
= 3% x [$6Million/ $1.2 Million]
= 3% x $5Million
= $0.15Million
Problem 7
Solution:
a.
For 9 % Mortgage Bounds

Interest Rate/ Expense = [9 / 100] x 2500,000 = $231,250
b.
For 12 3/8% second Mortgage Bounds

Interest Rate/ Expense = [9 3/8 / 100] x 1500,000 = $185625
c.
For 10 % debentures
Interest Rate/ Expense = [10 / 100] x 1000,000 = $102500
d.
For 14 %
Interest Rate/ Expense = [14 / 100] x 1000,000 = $145000
Total interest rate
= $664375
The overall interest ratio = EBIT / total interest expense
= $1.5 x 1000,000
$664375
= $2.258
Formulas:
1.Acid Test Ratio = (Current Assets Inventories)/ Current Liabilities
2.Average Collection Period = Receivables x 360 Days/ Annual Net Credit Sales
3.Account Receivable = [Annual Credit Sales x Average Collection Period]/ 360
Days
4.Bank Loan = Current Liabilities Payables Accrual
5.Current Assets = Current Liabilities x Current Ratio
6.Cost of Good Sold = Inventory x Inventory Turnover Ratio
7.Cost of Good Sold = (1 Gross Profit) x Net Sales
8.Current Liabilities = Total Liabilities Long Term Liabilities
9.Debt to Net Worth Ratio = Account Payable + Acct + Short Term Loans + Long
Term Loans
Total Assets [(Total Liabilities+ Net Worth)
(Net Worth)]
10.Debt-to-Equity =Total Debt/Shareholders Equity
11.Debt-to-Total-Assets = Total Debt/Total Assets
12.Earning power or return on investment (ROI) = Net Profit Margin x Total Assets
Turnover
13.Equity Multiplier = Total Assets/ Shareholders Equity
14.Gross Profit Margin = Gross Profit / Net Sales
or
= [1- Cost of Good Sold] x Net Sale
15.Gross Profit = Sales Cost of Good Sold
16.Inventory Turnover Ratio = Cost of Good Sold/ Inventory
17.Inventory = Current Assets Cash Receivable
18.Interest Coverage = EBIT/Interest Charges
19.Long Term Debt to Total Capitalization Ratio = Long Term Debt/ Total
Capitalization
20.Net Profit Margin = Net Profit after Taxes/ Net Sales
21.Net Fixed Assets = Total Assets Current Assets
22.Profit after Taxes = Profit after Taxes/ (1- T)
23.Payable Turnover (PT) = Annual Credit Purchases/Accounts Payable
24.Payable Turnover in Days = Days in the Year/Payable Turnover
25.Return on Equity = Net Profit after Taxes/ Shareholders Equity
26.Return on Equity = Net profit margin x Total asset turnover x Equity Multiplier
27.Return on Investment(ROI) = Net Profit after Taxes/Total Assets
28.Receivable Turnover = Annual Net Credit Sales/Receivables
29.Selling & Administrative Expense = Gross Profit Interest Expense Profit
Before Taxes
30.Total Asset Turnover = Net Sales/ Total Assets
31.Taxes = PBT PAT
32.Total Assets = Total Liabilities Shareholders Equity
33.Total Liabilities = Share Holder Equity x (Total Liabilities/Shareholders Equity)
34.Total Capitalization = Total Debt/Total Capitalization
CHAPTER 7
FUNDS ANALYSIS, CASH FLOW ANALYSIS & FINANCIAL PLANNING
Problem 1
Solution:
Source and uses of funds statement for Shemenge Brother Accordion
Company.
Source
1.Cash
Uses
$100
1.
Account Receivables
$700
2.Account Payable
$300
2.
Accrued Expenses
$300
3.
Long Term Debt
$100
3.Inventory
$200
4.Net Profit
$600
4.
Dividends
$1000
5.
Addition to fixed assets
$400
5.Depreciation
$900
$2300
$2300
Problem 3
Solution
a.
Source & Uses of funds Statement for BEGALLA Corporation for Dec 31,
1901 to Dec 31, 1902 ( in Millions).

Source
1.Account Payable
Uses
$2
1.
Cash & Equivalents
$1
2.
Account Receivable
$5
3.
Inventory
4.
Accrued Taxes
$1
2.Accrued Wages
$3
3.Retained Earning
4.
$1
$8
$8
$3
Problem 4
Solution
Cash Budget for the Ace Manufacturing Comapny
a.
Schedule of Projected sales & collection for May to August
August
Frame A: Sales
Credit sale (50%)
May
Jun
July
$35,000
$40,000
$50,000
$35,000
$40,000
$50,000
$70,000
$80,000
$100,000
$50,000
Cash Sale (50%)
$50,000
Total Sales
$100,000
Frame B: Cash Receipt
Cash sale this
month
$35,000
$40,000
$50,000
$50,000
90% of last Credit sales
$54,000
$63,000
$72,000
$6000
$109,000
$7000
$129,000
$90,000
10% of two months old
$6000
Total Cash Receipt $95,000
$8000
$148,000
Frame C: Cash Disbursement
b.
Schedule of Projected total cash disbursements for May to August

May
Jun
July
Selling, General & Adm Expense $17,000

$20,000
Interest
Dividends
Taxes
Capital Investment
$18,000
$20,000
Total cash Disbursement
$58,000
August
$17,000
$200,000
$10,000
$40,000
$1000
$231,000
$20,000
c.
Schedule of Projected Net Cash Flows & cash balances for Jan to Jun (in
thousands)
May
August
Beginning of cash balance (`)
Without additional financing
Jun
July
$20,000
$98,000
$149,000
$95,000
$109,000
$129,000
$17,000
$58,000
$231,000
$179,000
Total cash receipt (~)
$148,000
Total cash Disbursement (*)
$20,000
Net Cash Flow (~ - * =!)
$128,000
Ending cash balance without
additional financing (!+`)
$307,000
$78,000
$51,000
$30,000
$98,000
$149,000
$179,000
Problem 5
Solution
Cash Budget for the Central City Departmental Store
a.
Schedule of Projected sales & collection for Jan to Jun (in thousands)
Nov
Jun
May
Frame A: Sales
Credit sale (75%) 262.5
187.5
Dec
300.0
60% of last Credit

sales
Apr
112.5
150.0
150.0
225.0
37.5
50.0
50.0
75.0
150.0
200.0
200.0
300.0
37.5
50.0
50.0
180.0
67.5
90.0
90.0
78.75
90.0
33.75
45.0
22.5
26.25
30.0
11.25
318.75
233.75
203.75
221.75
67.5
10% of 3 months old

15.0
15.0
Total Cash Receipt
257.5
245.0
b.
Mar
122.5
30% of two months old

45.0
Feb
150.0
Cash Sale (25%) 87.5

100.0
62.5
50.0
Total Sale
350.0
400.0
250.0
200.0
Frame B:
Cash Collection
Cash sale this
75.0
62.5
50.0
Month
135.0
Jan
Schedule of Projected total cash disbursements for Jan to Jun (in thousands)
at 80% of the following month sales Value.

May
Cash Payment
160.0
Wages & Salaries
40.0
Rent
2.0
Interest
Jan
Feb
Jun
for purchases 160.0
240.0
30.0
40.0
35.0
2.0
2.0
2.0
Mar
160.0
Apr
240.0
200.0
50.0
50.0
2.0
2.0
7.5
7.5
Taxes
Capital Investment
50.0
30.0
Total cash Disbursement
202.0
c.
192.0
202.0
299.60
302.0
314.5
Schedule of Projected Net Cash Flows & cash balances for Jan to Jun (in
thousands)
Jan
May
Jun
Beginning of cash balance (`)
Without additional financing
82.0
202.0
100
226.75
158.5
318.75
233.75
203.75
192.0
202.0
299.60
162.75
302.0
314.5
Net Cash Flow (~ - * =!)

126.75
55.5
-69.5
Ending cash balance without
additional financing (!+`) 226.75
31.75
-95.75
-80.75
258.5
162.75
82.0
68.0
Borrowing (prepayments)
Required to maintain a
Minimum balance of $100
20
Apr
245.0
Total cash Disbursement (*)
137.5
Mar
137.5
Total cash receipt (~)

221.75 257.5
Feb
20
35.0
Ending cash balance with

additional financing
226.75
157.0
103.0
158.5
162.75
102.0
Problem 6
Solution
Forecast Income Statement for First Six Months Ending Jun 31, 2002
( in thousands)
Net Sales
$1300
schedule of the estimate
(From Jan to Jun 20x2)
Cost of good sold
$1040
the net sale
Gross Profit
$260
Operating Expenses
Rent
$12.0
Interest
$15.0
Depreciation
$12.5
Wages & Salary
$245.0
(From Jan to Jun 20x2)
Total Expenses
$284.50
Net Profit before Taxes
$24.5
Based on the
Forecast @ 80% of
2000/month
7500/quarter
25000/year
Problem 7
Solution
Central City Departmental Store, Forecast Balance Sheet at Jun 31,
20x2 ( in thousands)
Assets
Actual
Change
Cash
$100
+3
103.30(earned on cash budget)
Receivables
$427.5
-180
Jun credit sales + 40%
May credit sales+10% Apr credit
sales)
Inventory
$200
+120
(inventory of 12/31/x1 +
forces & purchases- forecast cost of
good sold)
Prepaid Taxes
$0
+50.0
Current Assets
$727.5
-7.0
Net Fixed Assets
$250.0
+17.5
expenditure-$30-$12.5
depreciation)
Total assets
$977.5
$10.5
Liabilities
Actual
Change
Forecast
247.0 (100%
320.0
+50.0
720.5
267.5 (capital
$988
Forecast
Bank borrowing
0.0
+35.0
(previous balance)
Account Payable
130.0
0.0
additional finance needs
Current liabilities 130.0
35.0
Bonds
500.0
0.0
change)
Common Stock
347.5
-24.5
323.0(retained earnings 12/32/x1
minus 24.5 loss)
Total Liabilities
$977.5
$10.5
+35.0
+ 130.0 +
165.0
500.0 (no
$988
CHAPTER 8
OEVR VIEW OF WORKING CAPITAL MANAGEMENT
Problem No 1
Given Data:Sale level = $280,000
Profit Margin = 10%
Fixed Assets = $100,000
Current Assets = $50,000
Total Assets = $100,000 + $50,000 = $150,000
Solution:-
1.(a)
i.
ii.
i.
Total assets turn over = ?
ii.
Rate of return before taxes =?
Total assets turn over = Sale Level

Total Assets
= 280,000
= $1.87
150,000
Rate of return before taxes = EBIT
Total Assets
= 280,000 x 0.1 x 100
150,000
= 18.67 %
1.(b)
Profit
Current
Account
Fixed
Account
Total
Account
$28,000
$10,000
$100,000
$110,000
$28,000
$25,000
$100,000
$125,000
$28,000
$40,000
$100,000
$140,000
$28,000
$55,000
$100,000
$155,000
$28,000
$70,000
$100,000
$170,000
$28,000
$85,000
$100,000
$185,000
$28,000
$100,000
$100,000
$200,000
Rate of return =
EBIT x 100
Assets
(28,000/110,000)100
= 25.45%
(28,000/125,000)100
= 22.40%
(28,000/140,000)100
= 20%
(28,000/155,000)100
= 18.06%
(28,000/170,000)100
= 16.47%
(28,000/185,000)100
= 15.13%
(28,000/200,000)100
= 14%
Problem No 2
Given Data:Date
3/31/1
6/30/1
9/30/1
12/31/1
3/31/2
6/30/2
9/30/2
12/31/2
3/31/3
6/30/3
9/30/3
12/31/3
Q1
Q2
Q3
Q4
Q5
Q6
Q7
Q8
Q9
Q10
Q11
Q12
Fixed Assets
(Million $)
50
51
52
53
54
55
56
57
58
59
60
61
Current Assets
(Million $)
21
30
25
21
55
31
26
22
23
32
27
23
Total Assets
(Million $)
71
81
77
74
76
86
82
79
81
91
87
84
Solution:-
100
90
80
70
60
50
40
30
20
10
0
Total Assets
Fixed Assets
1st
Qtr
3rd
Qtr
5th
Qtr
7th
Qtr
9th
Qtr
Problem No 3
Given Data:Short term borrowing
= 1% over prime
Company equity capital
= $4.5 million
Present prime ratio
= 11%
Total prime ratio
= 11 + 1
=12%
Prime rate of interest per qtr = 12/4
= 3%
Intermediate term debt
= 13.5%
Three alternative amounts = $0, $500,000, $1 million
11th
Qtr
Solution:-
Alter 1 (0%)
Borrowing
Cost
Alter 2
($500,000)
Borrowing
Cost
Alter 3
($1 Million)
Borrowing
Cost
1st Qtr
0 x 13.5%
=0
$(4.8-4.5-0)
$30,000 x 3%
= $9,000
500,000 x
13.5%
$(4.8-4.5-0.5)
$0
$0
1 Million x
13.5%
$(4.8-4.5-1)
$0
$0
2nd Qtr
$(5.5-4.5-0)
$1000,000 x
3%
3rd Qtr
$(5.9-4.5-0)
$140,000 x
3%
4th Qtr
$(5-4.5-0)
$500,000 x
3%
=$30,000
= $42,000
= $15,000
Total Cost
0
$96,000
$67,500
$(5.5-4.5-0.5)
$500,000 x
3%
= $15,000
$(5.9-4.5-0.5)
$900,000 x
3%
= $27,000
$(5-4.5-0.5)
$0
$0
$(5.9-4.5-1)
$(5.5-4.5-1)
$400,000 x
$(5-4.5-1)
$0
3%
$0
$0
= 12,000
$0
Total for three alternatives
3.(b)
Alternative no 1 is the best suitable, because it is the cheapest.
$109,500
$135,000
=$12,000
$ 352,500
CHAPTER 9
CASH & MARKETABLE SECURITIES MANAGEMENT
Problem No 1
Given Data:Average gasoline and products payment = $420,000 per day
Duration of time
= 6 Days
Solution:
a.
Total amount tied up in this interval
= $420,000 x 6
= $2,520,000
= $2.52 million
b.
Fund released = $420,000 x 2 = $840,000

Cost
= $93,000
Opportunity cost of funds = 9%

Value of fund released on annual basis = $840,000 x 0.09
= $75,600
Result:
The company should not inaugurate the plan,
because here the cost is $93,000 while the benefit

$75,600.
is
c.
Total fund released = $420,000 x 1 = $420,000

Cost
= $10,300
Opportunity cost
= 9%
Value of fund released on annual basis = $420,000 x 0.09

= $37,800
Result:
The company should under take this plan,
because here the cost is $10,300 and the benefit

$37,800.
Problem No 2
Given Data:Company earns on money market investment = 7%
Bank Handles = $3 million
Compensating balance = $2 million
Solution:
a.
Annual Saving = ?
Saving in collections = $3000,000 x day
= $1.5 million ~~~~~~~(A)
Compensating balance increases = $(2 1 2)
= -$1 million ~~~~(B)
Net saving = A + B
= $(1.5 1) = $0.5 million
Opportunity cost = 7%
Annual saving
= $0.5 million x 0.07

= $35,000
are
b.
Opportunity cost at 7% = $2.0 million x 0.07

= $140,000
Annual saving
= -$35,000
Maximum fee that the

bank could charge
= $140,000 - $35000
= $105,000
Problem No 3
Given Data:Weakly payroll of EF Company = $150,000
Companies employ cash their checks in the following
manner:-
Day checks cleared on

companys account
Friday
Monday
Tuesday
Wednesday
Thursday
Percentage of check cashed

20%
40%
25%
10%
5%
Solution: To arrange payroll account

Day checks cleared on
companys account
Friday
Percentage of check
20%
Monday
Tuesday
Wednesday
Thursday
Result:
Amount cashed
cashed
40%
25%
10%
5%
$150,000 x 0.2
= $30,000
$150,000 x 0.4
= $60,000
$150,000 x 0.25
= $37,500
$150,000 x 0.1
= $15,000
$150,000 x 0.05
= $7,500
The problem here are of uncertainty and greater the
uncertainty greater should be the cushion.
Problem No 4
Given Data:Clothing outlets of Sitmore & Dolittle Inc = 41
Average amount send by each outlet
= $5,000 per day
Time or duration
= 6 days
Solution:
a.
Amount of fund released
= $5000 x 41 x 6
= $1,230,000
= $1.230 million
b.
Compensating balance
Fund released
= $15,000
= $15,000 x 41
= $615,000
Net saving
= $1230,000 615,000
= $615,000
c.
i.
Amount of interest
= 10%
Earn on net released fund in case b = $615,000 x 0.1

= $61500
ii.
Total cost for 250 electronics transfer by 41 stores

= $250 x 41 x $7
= $71,750
Result:
The proposed arrangement would be not worth enough,
because here the cost $71750 and the benefits are

$61500.
CHAPTER 10
ACCOUNTS RECEIVABLE & INVENTORY MANAGEMENT
Formulas:
Total Inventory Cost:
Tc = C [Q] + O[S]
2
Q
Economic Order Quantity:
Q = 2 (O) (S)
C
Problem No 1
Given data:
Annual credit sale = 24 million
Average collection period = 30 days
Price = $20
Variable cost = $18
Opportunity cost rate of funds invested = 30 %
Policy
Increase in sale(million)
ACP for incremental sale
A
$2.80
45 Days
B
$1.80
60Days
C
$1.20
90Days
D
$0.60
144Days
Alternative Solution:
1.New receivable turnover
= 360/new ACP
8 times
6 Times
4 Times
2.5
Times
2.Profitability of additional sales
= CM/Unit/Dollar x 0.28
0.18
0.12
0.06
(Additional sale)
(2/20x2.8)
(2/20x1.8)
(2/20x1.20)
(2/20x 0.60)
Additional receivable associated
(2.8/8)
(1.8/6)
(1.2/4)
(0.6/2.5)
3 with new sales = (Add sales)/
0.35m
0.30m
0.30m
0.24m
Net RT
Investment
in
additional 0.35x18/20 0.30x18/20
0.30x18/20
0.24 x18/20
receivable Associated to new
4 sale =(Additional receivable
0.315m
0.27m
0.27m
0.216m
var.cost
/unit)
Total investment in add
0.315
0.27
0.27
0.216
5
receivable
Required before taxes on add
(0.315 x
(0.27 x
(0.27 x
(0.216 x
rece
30%)
30%)
30%)
30%)
=(Total invest in add receivable 0.0945
0.081
0.081
0.0648
6
x
Opportunity cost
rate)
Difference on #2 - #6
0.1855
0.099
0.039
-0.0048
Problem No 3
Given data:
Annual credit sale = 24 million
Average collection period = 30 days
Price = $20
Variable cost = $18
Opportunity cost rate of funds invested = 30 %
Policy
Increase in sale(million)
ACP for incremental sale
A
$2.80
45 Days
B
$1.80
60Days
C
$1.20
90Days
D
$0.60
144Days
4 Times
2.5Times
$1.2
(2/20x1.20)
$0.60
(2/20x .60)
$0.18
$0.12
$0.06
$0.042
$0.054
$0.060
$0.045
(2.8/8)
(1.8/6)
(1.2/4)
(0.6/2.5)
0.35m
0.30m
0.35x18/20 0.30x18/20
0.30m
0.30x18/20
0.24m
0.24
x18/20
0.315m
0.27m
Solution:
1
2
3
4
5
6
7
8
New receivable turnover

= 360/new ACP
Increase in sale(Million)
Profitability of additional sales
= CM/Unit/Dollar x
(Additional sale)
Add bad debit loses (Increase in
sale x Bad debit loses)
Additional receivable associated
with new sales = (Add sales)/
Net RT
Investment in additional
receivable Associated to new
sale =(Additional receivable
var.cost
/unit)
Total investment in add
receivable
Required before taxes on add
recc
=(Total invest in add receivable
x
Opportunity cost
rate)
8 times
6 Times
$2.8
$1.8
(2/20x2.8) (2/20x1.8)
$ 0.28
0.27m
0.216m
0.315
(0.315 x
30%)
0.0945
0.27
0.27
0.216
(0.27 x
30%)
0.081
(0.27 x
30%)
0.081
(0.216 x
30%)
0.0648
Difference on #3- #8
Problem No 5
0.185
0.099
0.039
-0.0048
Given data:
Credit sale= $ 12 Million
Bad debits= $ 480,000
Collection cost= $ 220,000
Average collection period= 2.5 Months (75 Days)
Solution:
Receivable turnover (360/ACP) = 4.8 Times
Average receivable (current)
Credit sale/ RT= 12/4.8
= $2500,000
Proposed condition:
New ACP
Receivable turnover (360/60)
New average receivable (12/6)
Bad debits (3% of credit sale)
Additional collection cost
2 Months (60 Days)

6 Times
$2000,000
$360,000
$180,000
Saving due to new proposal:

Speed up in collection of A/R (2.5 Million 2 Million)
Bad debit reduction (480,000 360,000)
Total saving (500,000 + 120,000)
Required pre tax return @ 20% (620,000 x 20%)
Required pre tax return @ 10% (620,000 x 10%)
$500,000
$120,000
$620,000
$124,000
$62,000
Evaluation:
In both the cases the cost of collection is > required Pre Tax Return on total
savings
Problem No 7
Given data:
Carrying cost C = $1
Order cost O
= $100
Sales S
= 5000
Solution:
a.
When order is 1 times.

Tc = C [Q] + O[S]
2
Q
= $1[5000] + $100[5000]
2
5000
= $1[2500] + $100[1]
= 2500 + 100 = $2600
When order is 2times
Tc = C [Q] + O[S]
2
Q
= $1[2500] + $100[5000]
2
2500
= $1[1250] + $100[2]
= 1250 + 200 = $1450
Tc = C [Q] + O[S]
2
Q
= $1[1000] + $100[5000]
2
1000
= $1[500] + $100[5]
= 500 + 500 = $1000
Tc = C [Q] + O[S]
2
Q
= $1[500] + $100[5000]
2
500
= $1[250] + $100[10]
= 1250 + 1000
= $2250
Tc = C [Q] + O[S]
2
Q
= $1[250] + $100[5000]
2
= $1[125] + $100[20]
250
= 125 + 2000
= $2125
b.
Economic Order Quantity:

Q = 2 (O) (S)
C
Q = 2 (100) (5000)
1
=
1000,000
1
Q = 1000
c.
It is assumed that sales are made at a steady rate, which may not be correct for
text books. The
nature of academics suggests that sales will occur at the
beginning of each term.
Problem No 8
Given data:
Carrying cost C = $8
Order cost O
Sales S
a.
= $200
[Total No of Dints] = 12 x 150,000 = 1800,000
Economic Order Quantity =?

Q = 2 (O) (S)
C
b.
=
8
2 (200) 1800,000
90000,000
= 9487
Total Inventory Cost =?
Tc = C [Q] + O[S]
2
Q
= $8[9487] + $200[1800,000]
2
9487
= $8[4743.5] + $200[189.7]
= 37948 + 3795
= $41743
c.
1800,000
9487
190(Approximately)
190 times a year or after every two days.
Problem No 9
Given data:
Sales S = 5000 Blivets
Order cost O = $200
Holding/carrying cost C = 0.04
Solution:
a.
Economic Order Quantity =?

Q = 2 (O) (S)
C
=
=
2 (200) 5000
0.04
50,000,000
= 7071 Blivets
b.
Total Inventory Cost =?

Tc = C [Q] + O[S]
2
Q
= $0.04[7071] + $200[5000]
2
7071
= $0.04[3535.5] + $200[0.7071]
= 141.4 +141.4
= $282.82
2000,000
0.04
CHAPTER 11
SHORT TERM FINANCING
Problem No 1
Given data:
Dud company purchases raw material on term of = 2/10,Net 30
Payment made = 15 Days
Cost of fund = 2%
Bank loan cost = 12%
Solution:
a.
What mistake Mr Blunder making?

Mr Blander is confusing the %age of using funds for 5 days with the cost of
using funds for a
year. These costs are not clearly comparable. One must be
converted to the time scale of other.

b.
Real cost=?
2/10, Net 30
X% =
2 x
365
(100- 2) (30- 10)
= 2 x 365
(98)
(20)
= 0.0204 x 18.5
= 0.3723
= 0.3723 x 100 = 37.2%

c.
If in case he has no access to the banking funds it makes no sense. If he makes
his payments on 30th days instead of 15th days it cost of financing 36.5%
37.2%.
instead
of
Problem No 2
Given data:
Assume 365 days per year.
Assume that the firm can not take discount.
Solution:
a.
1/20, net 30($500 invoice).

X% =
1 x 365
(100-1) (30- 20)
= 1 x 365
(99)
(20)
= 0.0101 x 18.25
= 0.1843
= 0.1843 x 100 = 18.43%

b.
2/30, net 60($1000 invoice).

X% =
2 x 365
(100-2) (60- 30)
= 2 x 365
(98)
(30)
= 0.0204 x 12.17
= 0.248
= 0.2482 x 100 = 24.82%

c.
2/5, net 10($100 invoice).

X% =
2 x 365
(100-2) (10-5)
= 2 x 365
(98)
(5)
= 0.0204 x 73 = 1.489
= 1.489 x 100 = 149%

d.
3/10, net 30($250invoice).

X% =
3 x 365
(100-3) (30-10)
= 3 x 365
(97)
(20)
= 0.0309 x 18.25
= 0.5639x 100 = 56.39%
= 0.5639
Problem No 4
Given data:
Assume 365 days per year. (10 days stretching of payment date)
Assume that the firm can not take discount.
Solution:
a.
1/20, net 40($500 invoice).

X% =
1 x 365
(100-1) (40- 20)
= 1 x 365
(99)
(20)
= 0.0101 x 18.25
= 0.1843
= 0.1843 x 100 = 18.43%

b.
2/30, net 70($1000 invoice).

X% =
2 x 365
(100-2) (70- 30)
= 2 x 365
(98)
(40)
= 0.0204 x 9.125
= 0.186
= 0.186 x 100 = 18.62%

c.
2/5, net 20($100 invoice).

X% =
2 x 365
(100-2) (20-5)
= 2 x 365
(98)
(15)
= 0.0204 x 24.33
= 0.496
= 0.496 x 100 = 49.64%

d.
3/10, net 40($250invoice).

X% =
3 x 365
(100-3) (40-10)
= 3 x 365
(97)
(30)
= 0.0309 x 12.17
= 0.3759
= 0.3759 x 100 = 37.6%

Problem No 5
Given data:
Credit agreement with 1st State Bank (SB) = $5 Million
Bank cost rate = 1%
Commitment fee on unused portion = %
Expected CD rate = 9%
Expected utilized on commitment = 60%
Solution:
a.
What is the expected annual dollar cost?

Used portion = $5 Million x 10% x 60% = $300,000
Commitment fee = $5 Million x 40% x % = $10,000
Annual Dollar Cost (ADC) = $300,000 + $10,000
= $310,000
b.
Percentage cost=
ADC
= 310,000 = 0.1033
60% of used portion
3000,000
= 0.1033 x 100
c.
= 10.33%
What is the percentage cost of 20% of total commitment is utilized?

Used portion = $5 Million x 10% x 20% = $100,000
Commitment fee = $5 Million x 80% x % = $20,000
Annual Dollar Cost (ADC) = $100,000 + $20,000
= $120,000
Percentage cost=
ADC
80% of used portion
= 0.12 x 100
= 12%
= 120,000 = 0.12
1000,00
Problem No 6
Given data:
Bork Corporation borrows = $100,000 for one year.
Which alternate should Bork Corporation choose =?
Solution:
a.
8% loan on a discount basis with 20 % compensating balance.

Loan on discount basis = $100,000 x 8% = $8,000
Compensating balance = $100,000 x 20% = $20,000
Total
= $20,000 + $8,000 = $28,000
Annual interest rate = 8% of $100,000

Borrow total
= 8,000
72,000
=
8,000
100,000 28,000
= 0.111
= 0.111 x 100
=11.11%
b.
9% loan on a discount basis with 10 % compensating balance.

Loan on discount basis = $100,000 x 9% = $9,000
Compensating balance = $100,000 x 10% = $10,000
Total
= $10,000 + $9,000
= $19,000
Annual interest rate = 9% of $100,000

=
9,000
Borrow total
100,000 19,000
= 9,000
81,000
= 0.111
= 0.111 x 100
=11.11%
c.
10.5% loan on a discount basis with no compensating balance.

Loan on discount basis = $100,000 x 10.5% = $10,500
Compensating balance = Nil
Total
= $10,500
Annual interest rate = 10.5% of $100,000 =

Borrow total
= 10,500
89,500
10,500
100,000 10,500
= 0.1173
= 0.1173 x 100 =11.73 %

Description: By compensating the three alternatives the Bork Corporation should
choose any of
the first two alternatives, because it will pay lesser value of
interest rate as
compare to the third alternative.
Problem No 7
Given data:
Company needs $200,000 over next 90 days.
Unencumbered inventories = $570,000
a.
Alternative 1
Finished good inventory = $300,000
Company borrow = $200,000
Interest rate = 10%
Reduce quarterly before taxes = $4000
Warehousing cost = $3000
Interest cost = 10% x 200,000 [ 90 ]
365
= $4932
Total = RQBT + WC + IC
= $4000 + $3000 + $4932
= $11932
b.
Alternative 2.
No additional expanses incurred.
Interest rate = 23%
Interest cost = 200,000 x 23% [ 90 ]
365
= $ 11342
Result:By comparing the two results, the company should fallow the alternative 2.
Although the interest rate is grater, but different additions in
alternative 1 make
it more expensive than alternative 2.
Problem No 8
Given data:
Fee that factor charges = 2%
Lending of receivable = 80%
Additional percentage = 1.5% per month
Firms per sale = $500,000(70% of which on credit)
a.
Amount required to support a credit department = $2,000 /m

Factoring cost = $500,000 x 70% = $350,000
Fee that factor charges = $350,000 x 2% = $7,000 `````` (A)
Lending cost = $100,000 x 1.5% = $1500 ```````````````````` (B)
Total cost = A + B
= $7000 + $1500
b.
= $8500
Bank interest cost = $100,000 x 15%/12
= $1250 ``````(A)
Processing cost = $100,000 x 2%
=$2000 ``````(B)
Credit department supporting cost

Bad debt expenses = $500,000 x 70% x 1%
Total cost = A+ B+ C + D
=$2000`````` (C)
= $3500``````(D)
= $8750
Description: The firm should not discontinue the factoring arrangement, because it
gives
the total cost value of $8500 which is less than the bank
borrowing process
cost of $8750.
Problem No 9
Given data:
Interest rate = Prim rate + 7.5%
Interest rate above the prim rate = 25%
Servicing cost = $20,000 Per Quarter.
Solution:
Differential interest rate = 7.5% - 2.5%
= 5% (for the whole year)
Interest cost per quarter = 5/4
Quarter
1
2
3
4
Inventories level
$1,600,000
$2,100,000
$1,500,000
$3,200,000
Annual Savings
= 1.25%
Inventories x 1.25%
$20,000
$26,250
$18,750
$40,000
$105,000
Saving cost per quarter = $20,000

Therefore, annual servicing cost = $20,000 x 4 = $80,000
Description: The Company should switch to financing arrangement. Since the
annual saving
are graters than the servicing costs.
CHAPTER 12
CAPITAL BUDGETING & ESTIMATING CASH FLOW
Problem 1
Thoma Pahrmacentral Company
Data:
Cost of DNA testing equipment = $60,000
Equipment useful life = 5 years
Tax rate = 38%
Required rate of return = 15%
Salvage value = 0 (at the end)
Requirement:
Relevant cash flow =?
Solution
End of the years

1
$20,000
$20,000
$20,000
$20,000
5
1.Labour savings
$20,000
2.Depreciation (New) [MACRS]
$4446
$19998
$26670
$8886
3.Profit charges before Taxes

$20,000
(2 3)
4.Taxes @ 38%
$2
($6670)
$11,114
$15,554
$1
($2535)
($4223)
$5911
$1
($4135)
$6891
$9643
$19999
$22535
$15777
$14089
$7600
5.Profit changes after taxes
$12400
(4 - 3)
6.Net cash flow
$12400
(5 + 2)
Problem 2
Data:
Expected inflation in savings from labour = 6%
Cost of DNA testing equipment = $60,000
Equipment useful life = 5 years
Tax rate = 38%
Required rate of return = 15%
Salvage value = 0 (at the end)
Requirements:
a.Relevant cash flow =?
b.Effect on relevant cash flow =?
Solution
a.
1
End of the years

2
5
1.Labour savings
$20,000
$21,200
$22471
$23820
2.Depreciation (new) [MACRS]$19998
$26670
$8886
$4446
$2
($5470)
$13586
$19374
$1
($2079)
$5163
$7362
$1
($3391)
$8423
$12012
$19999
$23279
$17309
$19458
$25250
3.Profit charges before Taxes
$25250
(2 3)
4.Taxes @ 38%
$9595
5.Profit changes after taxes
$15655
(4 - 3)
6.Net cash flow
$15655
(5 + 2)
b.
Effect on relevant cash flows

Year 0(zero)
Year 5
1.Cost
$60,000
Net cash flow before working Capital
$15655
2.Working Capital
Capital
$10,000
Working
$10,000
3.ICO
$70,000
Terminal Year Net Cash Flow
$25655
Problem 3
Solution
a.
Relevant cash flow

Annual Cash out Flow
Time of cash flow
Rock Built Trucks Inc
Bulldog Truck Inc

1.
($74,000)
($59,000)
2.
($2000)
($3000)
2.
($2000)
($4500)
3.
($2000)
($6000)
4.
($2000)
($22500)
5.
($13000)
($9000)
6.
($4000)
($10500)
7.
($4000)
($12000)
8.
($4000) + $9000 = $5000

($8500)
($13000) + $5000 =
Cash Flow Savings or Net Cost Savings

Time of cash flow
[Rock Built Trucks Inc - Bulldog Truck Inc]
1.
($74,000) - ($59,000) = ($15000)
2.
($2000) - ($3000)
= $1000
2.
($2000) - ($4500)
= $2500
3.
($2000) - ($6000)
= $4000
4.
($2000) - ($22500)
= $20500
5.
($13000) -($9000)
= ($4000)
6.
($4000) - ($10500)
= $6500
7.
($4000) - ($12000)
= $8000
8.
$5000 - ($8500)
= 13500
Problem 4
Requirements:
a.Annual incremental cash inflow =?
b.Initial cash out flow =?
Solution
a.
Annual incremental cash inflow

End of the years
1
2
1.Labour savings
$12,000
$12,000
$12,000
$12,000
2.Depreciation (new)
$19998
$26670
$8886
$4446
3.Depreciation (old)
$4520
4.Incremental Depreciation
(2 3)
5.Profit charge before taxes
(1 4)
6.Taxes @ 40%
(5 x 40%)
7.Profit charges after taxes
(5 - 6)
8.Operating cash flow
(4 + 7)
9.Incremental salvage value
(60% of 13000)
10.Net cash flow
$15478
$26670
$8886
$4446
($3478)
($14670)
$3114
$7554
($1391)
($5868)
$1246
$3022
($2087)
($8802)
$1868
$4532
$13391
$17868
$10754
$8678
$7800
$17868
$10754
$1678
$13391
b.
Initial cash out flow

ICO = Cost of new machine Current salvage value of old machine + Taxes
due to sale of old
machine
= $60,000 $8000 + {($8000 - $4520) x 40%}

= $52,000 + {$3480 x 40%}
= $52,000 + $1392
= $53392
Problem 5
Requirements:
a. Relevant cash flow =?
b. Initial cash out flow =?
Solution
a.
Annual incremental cash inflow

End of the years
1
1.Labour savings
$12,000
$12,000
$12,000
$12,000
2.Depreciation (new)
$20665
$27559
$9182
$4594
3.Depreciation (old)
$4520
4.Incremental Depreciation
(2 3)
5.Profit charge before taxes
(1 4)
6.Taxes @ 40%
(5 x 40%)
7.Profit charges after taxes
(5 - 6)
8.Operating cash flow
(4 + 7)
9.Incremental salvage value
(60% of 13000)
10.Net cash flow
$16145
$27559
$9182
$4594
($4145)
($15559)
$2818
$7406
($1658)
($6224)
$1127
$2962
($2487)
($9335)
$1691
$4444
$13658
$18224
$10873
$9038
$7800
$18224
$10873
$16838
b.
$13658
Initial cash out flow

ICO = Cost of new machine Current salvage value of old machine + Taxes
due to sale of old
machine
= $62,000 $3000 + {($3000 - $4520) x 40%}
= $59,000 + {($1550) x 40%}
= $59,000 + ($608)
= $58392
CHAPTER 13
CAPITAL BUDGETING TECHNIQUES
Problem 1
Labors Inc
Solution
Project A
Project B
Year Cash Flow
Cash Inflow
Year Cash
Flow
Cash Inflow
0
($9000)
$5000
$4000
($12000)
$5000
$5000
$9000
$5000
$12000
$8000
$5000
2
$10,000
3
$3000
$18,000
PBP = a + (b c)
c)
d
PBP = a + (b
d
= 2 + (9000 9000) = 2 Years
10000) = 2.25 Years
3000
NPv = CF1 + CF2 + CF3 + . . ICO

+ CF3 + . . - ICO
(1 + i) (1+ i)2 (1 +i)3
NPv = CF1
(12000
3000
+ CF2
(1 + i)
(1+
i)2 (1 +i)3
= 5000 + 4000 + 3000 +... 9000
3000 +... 12000
(1+0.15) (1+0.15)2 (1+0.15)3
= 5000 +
4000 +
(1+0.15) (1+0.15)2
(1+0.15)3
= 4347.82 + 3024.57 + 1972.5 9000
= 4347.82 + 3700.72
+ 5260.13 12000
= 9344.89 9000 = 344.89
= 13388.67 12000 =
1388.67
PI = Pv
= 9344.99
= 1.038
= Pv
13388.87
= 1.12
ICO
9000
ICO
Problem 3
a.Given Data:
Pv = $1000
Fv = $2000
n = 10 Years
IRR =?
Solution
i = 9%
Pv = Fv
= 2000 = 2000
n
[1 + i] [1 + 0.09]10
[1.09]10
NPv = Pv ICO
= 844 1000 = -156
= 844
12000
i = 6%
Pv = Fv
= 2000 = 2000
[1 + i] n [1 + 0.06]10
[1.06]10
= 1116
NPv = Pv ICO
= 1116 1000 = 116
IRR = LR +
PVL
PVL - PVH
= 6 + 116
x [HR LR]
x [9-6]
= 6 + 116
x3
= 6 + 1.279
= 20 + 3.44
7.279%
116-(-156)
272
b.Given Data:
Pv = $1000
Fv = $500
n = 3 Years
IRR =?
Solution
i = 20%
Pv = Fv
= 500
[1 + i] n [1 + 0.20]3
= 500
[1.20]3
= 1053
= 500
[1.25]3
= 976
NPv = Pv ICO
= 1053 1000 = 53
i = 25%
Pv = Fv
= 500
[1 + i] n [1 + 0.25]3
NPv = Pv ICO
= 976 1000 = -24
IRR = LR +
PVL
PVL - PVH
= 20 + 53
x [HR LR]
x [25-20]
= 20 + 53
x5
23.44%
53 -(-24)
c. i = 30%
Pv =
Pv =
Pv =
77
Fv
= 900
n
[1 + i] [1 + 0.30]
1.30
Fv
= 500
[1 + i] n [1 + 0.30]2
1.69
Fv
= 100
= 900
= 692
= 500
= 295
= 100
= 295
[1 + i] n [1 + 0.30]3
2.197
= 1032
NPv = Pv ICO
=1030 1000 = 32
i = 35%
Pv = Fv
= 900
n
[1 + i] [1 + 0.35]
Pv =
Pv =
= 900
= 666
= 500
= 274
1.35
Fv
= 500
[1 + i] n [1 + 0.35]2
1.823
Fv
= 100
n
[1 + i] [1 + 0.35]3
= 100
2.460
= 40
= 980
NPv = Pv ICO
=980 1000 = -20
IRR = LR +
PVL
PVL - PVH
= 30 + 32
x [HR LR]
x [35-30]
= 30 + 32
x5
= 20 + 3.08
33.08%
32 - (-20)
52
d.Pv = Annuity
i
i = Annuity
Pv
= 130
1000
= 13%
Problem 5
Solution
1
6
7
1.Labour savings $8,000
Project A
End of the years
2
3
$8,000
$8000
$8000
$8000
$8960
$5376
$3225
3225
($960)
$2624
$4774
$4774
$8000 $8000
2.Depreciation
$1612
$5600
3.Saving after Dep $2400

$6387 $8000
(2 3)
4.Taxes @ 38% $816
($326)
$892
$1623
$1623
$2172 $2720
5.Saving after Tax $1584
($634)
$3151
$4215
$5280
(4 - 3)
6.Add Dep
$5600
$8960
3225
$1612
7.Net cash flow $7184

$5228 $5280
(6 + 5)
$1732
$3151
$5376
$3225
$8326
$7108
Note: Depreciation through MACRS method
$6377
$6377
Year Cash Flow
Cash Inflow
($28,000)
($28,000)
$7184
($20186)
$8326
($12490)
$7108
($5382)
$6377
($-995)
PBP = 3 +
5382
= 3.86 Years
6377
NPv = CF1 + CF2 + CF3 + CF4 + CF5 + CF6 + CF7 +. . . ICO
(1 + i) (1+ i)2 (1 +i)3 (1+ i)4 (1+ i)5 (1+ i)6 (1+ i)7
= 7184 + 8326 + 7108 + 6377 + 6337 + 5228 + 5280 +... 9000
(1+0.14) (1+0.14)2 (1+0.14)3 (1+0.14)4 (1+0.14)5 (1+0.14)6 (1+0.14)7
= 6301.75 + 6406.59 + 4707.93 + 3775.69 + 3312.01 + 2655.61 + 2110.09 9000
= 29,269.67 9000
= 1269.67
Years i = 15%
1
5986
Pv =
i = 20%
Fv
[1 + i] n
= 7184 = 6246
Pv =
Fv
= 7184
[1 + 0.15]
[1 + i] n
[1 + 0.20]
2
5781
Pv =
Fv
[1 + i] n
= 8326 = 6295
Pv =
Fv
= 8326
[1 + 0.15]2
[1 + i] n
[1 + 0.20]2
3
Pv =
= 4036
Fv
[1 + i] n
=6775
= 4586
Pv =
Fv
[1 + 0.15]3
= 6775
[1 + i] n
[1 + 0.20]3
4
Pv =
= 3075
Fv
[1 + i] n
=6377
= 3646
Pv =
Fv
[1 + 0.15]4
= 6377
[1 + i] n
[1 + 0.20]4
5
Pv =
= 2562
Fv
[1 + i] n
=6377
= 3170
Pv =
Fv
[1 + 0.15]5
= 6377
[1 + i] n
[1 + 0.20]5
6
Pv =
Fv
=5829
= 2520
Pv =
Fv
= 5829
= 1952
[1 + i] n
[1 + 0.15]6
[1 + i] n
[1 + 0.20]6
7
Pv =
= 1473
Fv
=5280
[1 + i] n
[1 + 0.20]7
= 1984
Pv =
Fv
[1 + 0.15]7
= 5280
[1 + i] n
28447
24865
IRR = LR +
PVL
x [HR LR]
PVL - PVH
= 15 + 447
= 15.62%
447 - (-3135)
x [20 - 15]
= 15 + 447
x5
= 15 + 0.62
3582
PI = Pv
= 29269.67 = 1.045
ICO
28000
Project B same as Project A
Problem 6
Solution
End of the years

2
5
1.Savings
$20,000
$20,000
$20,000
$20,000
2.Depreciation (new) [MACRS]$19998
$26670
$8886
$4446
$20,000
3.Saving after Dep
$15,554
(2 3)
4.Taxes @ 38%
$2
($6670)
$11114
$20,000
$1
($2535)
$4223
$5911
$1
($4135)
$6891
$9643
$19999
$22535
$15777
$14089
$7600
5.Saving after taxes
$12400
(4 - 3)
6.Net cash flow
$12400
(5 + 2)
NPv = CF1 + CF2 + CF3 + CF4 + CF5 +. . . ICO

(1 + i) (1+ i)2 (1 +i)3 (1+ i)4 (1+ i)5
= 19999 + 22535 + 15777 + 14089 + 12400 +... 60,000
(1+0.15) (1+0.15)2 (1+0.15)3 (1+0.15)4 (1+0.15)5
= 17390+23293 + 10373 +8055 +6164 60,000
= 65,275 60,00
= 5275
Problem 8
Solution
a.
The third, fourth and the fifth project should be undertaken for its best out
put and fulfilling the
requirements.
Third Project
Pv = PI x ICO
= 1.20 x 350,000 = 420,000
NPv = Pv - ICO
= 420,000 350,000
= 70,000
Fourth Project
Pv = PI x ICO
= 1.18 x 450,000 = 531,000
NPv = Pv - ICO
= 531,000 450,000
= 81,000
Fifth Project
Pv = PI x ICO
= 1.19 x 200,000 = 238,000
NPv = Pv - ICO
= 238,000 200,000
=38,000
CHAPTER 15
REQUIRED RETURN & THE COST OF CAPITAL
Problem 1
Zapata International
Given Data:
Debt = B
Equity = S
Solution
Kp = Ki (B) + Kc (S)
Problem 2
Given Data:B =$3 Million
S = $7 Million
Kd = 14%
D = 500,000
Tax Rate = 40%
Kp =?
Po = 7 Million
Solution
Kc = Do (1 + g) + g
Po
= 500,000 (1 + 0.11) + 0.11
= 18.92%
7,000,000
= 0.0792 + 0.11
Ki = Kd (1 Tax rate)
= 14 (1 0.4)
= 14 (0.60)
= 8.4%
Kp = Ki (Wi) + Ke (We)
= 8.4 (0.3) + 18.92 (0.7) = 2.52 + 13.24 = 15.76%
Problem 3
International Company Machine
Given Data:Year 2001
Year 2002
Ke =?
g = 15%
0.1892
Do = $3 per share
D = $3.45
Po = $300 per share

g = 20%
Solution
Year 2001
Year 2002
Kc = Do (1 + g) + g
Po
K c = Do + g
Po
= 3 (1 + .20) + 0.20
300
0.212 = 3.45 + 0.15

Po
= 3 (1.2) + 0.20
300
0.212 - 0.15 = 3.45

Po
= 0.012 + 0.20
= 21.27%
Po
=3.45 / 0.062
= 55.64
Problem 5
Manx Company
Given Data :Kc = 17%,
Tax = 40%,
Kd = 13%,
Kp = 12%,
Solution
Ki = Kd (1 Tax rate)
= 0.13 (1 0.4)
= 0.13 (0.60) = 7. 8%
Wi = equity = 8/16 x 100 = 50%

Wd = Debt = 6/16 x 100 = 37.5%
Wp = Preferred Stock = 2/16 x 100 = 12.5%
Kp = Ki (Wi) + Ke (We) + Kp (Wp)
= 0.78 (0.375) + 0.17 (0.5) + 0.12 (0.125)
= 0.2925 + 0.085 + 0.015
= 0.3925 or 39.25%
Problem 6
R Bar M Ranch
Given Data:Initial cost of project = 600,000

Annual cash flow forever = $90,000
WACC =?
WACC = 14.5%
Debt = $200,000
Common Stock = $200,000
Retained Earning = $200,000
Flotation Cost
Debt = 2%
Equity = 15%
Solution
NPv = CF Initial Cost + (Flotation Cost Debt + Equity)
I
= 90,000 [600,000 + (200,000 x 2% + 200,000 x 15%)]
0.145
= 620,689 [600,00 + (4000 + 30,000)]
= 620,689 634,000
Remarks:-
= -13,311
Rejected
Problem 7
Chon & Sitwell
Given Data:B = 1.28

Rm = 18%
Rf = 12%
Debt = 40%
Equity = 60%
Ki = 8%
Solution
a.
CAPM = Rf + (Rm Rf) B

= 0.12 + (0.18 0.12) x 1.28
= 0.12 + 0.06 (1.28)
b.
= 0.1968
= 19.68%
WACC = Ki (Wi) + Ke (We)

= 0.08 (0.4) + 0.1968 (0.6)
= 0.032 + 0.11808
= 0.15008 or 15.008 %
Problem 8
Acosta Sugar Company
Given Data:Rm = 15%,
Rf = 10%
Solution
a.
B = 1.10
RRR = Rf + (Rm Rf) B
= 10 + (15 - 10) x 1.10
= 10 + 5 (1.10)
b.
= 15.5%
Range of Required Rate of Return =?

At highest and lowest return.
Lowest = Rf + (Rm Rf) B
= 10 + (15 - 10) x 1
= 10 + 5 (1)
= 15%
Highest = Rf + (Rm Rf) B

= 10 + (15 - 10) x 1.4
= 10 + 5 (1.4)
= 17%
Range 15% to 17%

c.
Expected Value (Average) of Required Rate of Return

Expected Value of B =
=
(BPi)
Pi
Beta
(BPi)
0.2
0.20
0.3
1.10
0.33
0.2
1.20
0.24
0.2
1.30
0.26
0.1
1.40
0.14
1.17
RRR = Rf + (Rm Rf) B

= 10 + (15 - 10) x 1.17
= 10 + 5 (1.17) = 15.85%
Problem 9
Solution
Able Elba Palindrome, Inc
Year
Cash Flow
Pv
$50,000
50,000
= 50,000
$43478
(1 + 0.15)1
2
$50,000
50,000
(1.15)
= 50,000
$37807
(1 + 0.15)2
3
$150,00
150,000
(1.15)2
= 150,000
$98627
(1 + 0.15)3
4
$200114
$350,000
350,000
(1.15)3
= 350,000
(1 + 0.15)4
$380026
NPv =
Pv Initial Cost = 380026 400,000
(1.15)4
= -19,974
Rejected, because Pv is less than Initial cost

Problem 10
Totally Tubular Tube Company
Solution
CV =
NPv
Combination
CV
5.25/6.5
= 0.8076
E+1
5/6.8
= 0.7352
E+2
8/7.6
= 1.0526
E+3
6.5/7.2 = 0.9027
E+1+2
7.5/7.9 = 0.9493
E+1+3
5.6/7.5 = 0.7466
E+2+3
8.5/8.3 = 1.024
E+1+2+3
9/8.6
= 1.0465
CHAPTER 16
OPERATING & FINANCIAL LEVERAGE
Problem 1
Andrea S. Fault Seismometer company
Solution
a.
Sales
$880,000
Less: Variable Cost
$660,000
Less: Fixed Cost
$180,00
Total operating Expense
(4400 x 150)
$840,000
Net income before Taxes
$40,000
(24000/60
100)
Less:
b.
Tax @ 40%
Net Income
Break Even Point (BEP) Q =
16,000
$24,000
Fixed Cost
Sale Price Variable Cost
= 180,000 = 180,000
= 3600 units
200 150
50
Break Even Point (BEP) sales =
Fixed Cost
1 - Variable Cost
Sales Price
= 180,000
1 150/200
or
BEPQ x Sales
3600 x 200
c.
= 180,000
0.75
= $720,000
DOL4000 =
Q
Q1 QBEP
4000
4000 3600
= 10
DOL4400 =
Q
Q QBEP
4400
4400 3600
= 5.5
DOL4800 =
Q
Q QBEP
4800
4800 3600
=4
DOL5200 =
Q
Q QBEP
5200
5200 3600
= 3.25
DOL5600 =
Q
Q QBEP
5600
5600 3600
= 2.8
= $720,000
DOL6000 =
Q
Q QBEP
6000
6000 3600
= 2.5
Problem 2
Solution
a.
Sale price = $200 + $50 = $250

Fixed Cost = $180,000
Variable Cost = $150
Break Even Point =?
Fixed Cost
= 180,000 = 180,000
= 1800 units
250 150
100
b.
Sale price = $200

Fixed Cost = $180,000 - $20,000 = $160,000
Variable Cost = $150
Break Even Point =?
Fixed Cost
= 160,000 = 160,000
= 3200 units
200 150
50
c.
Sale price = $200

Fixed Cost = $180,000 + $60,000 = $240,000
Variable Cost = $150 - $10 = $140
Break Even Point =?
Fixed Cost
= 240,000 = 240,000
= 4000 units
200 140
60
Problem 3
Crazy Horse Hotel
Given Data:Capacity = 50 Horse

Price = $100
Fixed Cost = $1200
Variable Cost = $12 + $8 = $20 per Horse
Solution
a.
Break Even Point (BEP) =
Fixed Cost
= 1200
100 20
= 1200
80
= 15 horses
b.
Sales (40 x 100)
$4000
Less: Fixed Cost = $1200

Less: Variable Cost = $800
Total operating expense
Net Income
Problem 4
$2000
$2000
Cybernauts, Ltd
Given Data:Value = $5 Million

Debt = 16%
Preferred Stock = 15%
Common Stock = 20%
Income Tax = 50%
Solution
a.
EBIT
Less: Interest
Less:Tax@50%
EAT
Less: Dividend to
PSH
Earning available
toCSH(divided
by)
Outstanding
shares
EPS (earning per
share)
100% equity
30% debt
70% equity
50% debt
50% equity
Plan 1
$1000,000
$0
$1000,000
$500,000
$500,000
Plan 2
$1000,000
$240,000
$760,000
$380,000
$380,000
Plan 3
$1000,000
$400,000
$600,000
$300,000
$300,000
50% debt
20%preferred,
30%equity
Plan 4
$1000,000
$400,000
$600,000
$300,000
$300,000
$0
$0
$0
$150,000
$500,000
$380,000
$300,000
$150,000
$250,000
$175,000
$125,000
$2
$2.17
$2.4
$75,000
$2
Working
$5 M x 20% = $ 1M
For Interest
$5 M x 30% = 1500,000 x 16% = 240,000
$5 M x 50% = 2500,000 x 16% = 400,000
For Preferred Stock
$ 1 M x 15% = 150,000
For outstanding Shares
$5 M x 100% = $5 M/ 20 = 250,000
$5 M x 70% = $350,000/ 20 = 175,000
$5 M x 50% = $2500,000/ 20 = 125,000
$5 M x 30% = $1500,000 / 20 = 75,000
b.
Indifference Point
(1) Plan 1 & 3
EBIT C1
S1
EBIT 0
multiplication)
$250,000
=
=
EBIT C3
S3
EBIT 400,000
(By cross
$125,000
$125,000 EBIT = $250,000 (EBIT - $400,000)

EBIT ($250,000 - $125,000) = $10000,000,000
EBIT $75,000 = $10000,000,000
EBIT = 10000,000,000
75,000
= $800,000
(2) Plan 3 & 4

EBIT C3
S3
EBIT 400,000
multiplication)
$125,000
EBIT C4
S4
EBIT 400,000
(By cross
$75,000
$75,000 EBIT $30,000,000,000 = $125,000 EBIT - $50,000,000,000

EBIT ($125,000 - $75,000) = - $50,000,000,000 + $ 30,000,000,000
EBIT $50,000 = $20,000,000,000
EBIT = 20,000,000,000
50,000
= $400,000

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CHAPTER 3

THE TIME VALUE OF MONEY

FVA = Future value annuity.

PVA = Present value annuity.

Future Value Annuity Due

= 100 [(1.05)5 1] = 100[1.28 1]

differ from each other.

= 100 e 0.1 (10) = 100 e 1

25%, 1st Year Pv = 500

25%, 1st Year Pv = 100

50000 = A [(1 + 0.08) 10 - 1]

1(1 + 0.05) 15]

PVA= 10,000[1 0.481]

PVA= 10,000[1 0.239]

Earning power (ROI)

Net profit margin

Total asset turnover

Current Ratio = Current Assets

= $1300 x 360/ 12680 = 36.9 = 37 Days

Net Profit Margin = Profit after Taxes/ Sales

Profit after Taxes = Profit after Taxes/ (1- T)

$1000 - $560 = $440

Total Liabilities = Share Holder Equity x (Total Liabilities/Shareholders

Total Liabilities and Owners Equity = $3750 + $3750

Current Liabilities = Total Liabilities Long Term Liabilities

Bank Loan = Current Liabilities Payables Accrual

Total Assets = Total Liabilities Shareholders Equity

Current Assets = Current Liabilities x Current Ratio

Net Fixed Assets = Total Assets Current Assets

Account Receivable = Annual Credit Sales x Average Collection Period/ 360

Inventory = Current Assets Cash Receivable

Cost of Good Sold = Inventory x Inventory Turnover Ratio

Gross Profit = Sales Cost of Good Sold

Net fixed assets

Liabilities & Owners Equity

Income statement for 2006 (In Thousands)

Cost of good sold

Selling & administrative expense

Profit before taxes

Average collection period=?

Average Collection Period = Account Receivable x 360 Days/ Annual Credit

Company Return on Assets or Earning Power=?

Effect of New Equipment or Earning Power=?

Net Profit Margin = 3

For 9 % Mortgage Bounds

For 12 3/8% second Mortgage Bounds

Source and uses of funds statement for Shemenge Brother Accordion

Long Term Debt

Addition to fixed assets

1901 to Dec 31, 1902 ( in Millions).

Cash & Equivalents

Schedule of Projected total cash disbursements for May to August

Selling, General & Adm Expense $17,000

Total cash Disbursement

60% of last Credit

10% of 3 months old

30% of two months old

Cash Sale (25%) 87.5

at 80% of the following month sales Value.

Net Cash Flow (~ - * =!)

Total cash Disbursement (*)

Total cash receipt (~)

Ending cash balance with

Central City Departmental Store, Forecast Balance Sheet at Jun 31,