Chapter 3: 5DQ (page 219)
Why are Treasury bills a favorite place for financial managers to invest excess cash?
Investors use the treasury bills as they are highly liquid and can be easily sold whenever the investor requires cash.
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Colter Steel has \(4,200,000 in assets.
Temporary current assets | \)1,000,000 |
Permanent current assets | \(2,000,000 |
Fixed assets | \)1,200,000 |
Total assets | \(4,200,000 |
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
How is a cash budget used to help manage current assets?
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?
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 \(500,000 in fixed assets. Assume a tax rate of 40 percent.
b. Given that Guardian’s earnings before interest and taxes are \)200,000, calculate earnings after taxes for each of your alternatives.
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in the right-hand portion of Table 6-6.
1-year T bill at the beginning of year 1 | 5% |
1-year T bill at the beginning of year 2 | 8% |
1-year T bill at the beginning of year 3 | 7% |
1-year T bill at the beginning of year 4 | 10% |
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