Chapter 3: Q3DQ (page 218)
Why would a financial manager want to slow down disbursements?
The finance manager slows down the disbursements to increase the cash balance available with the organization.
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“The most appropriate financing pattern would be one in which asset build-up and length of financing terms are perfectly matched.” Discuss the difficulty involved in achieving this financing pattern.
Carmen’s Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January | \(8,500 |
February | \)2,500 |
March | \(3,500 |
April | \)8,500 |
May | \(9,500 |
June | \)4,500 |
Short-term financing will be utilized for the next six months.
January | 9% |
February | 10% |
March | 13% |
April | 16% |
May | 12% |
June | 12% |
Here are the projected annual interest rates:
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.
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 Table 6-6.
1-year T bill at the beginning of year 1 | 6% |
1-year T bill at the beginning of year 2 | 7% |
1-year T bill at the beginning of year 3 | 9% |
1-year T bill at the beginning of year 4 | 11% |
What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
Bombs Away Video Games Corporation has forecasted the following monthly sales:
January | \(100,000 |
February | \)93,000 |
March | \(25,000 |
April | \)25,000 |
May | \(20,000 |
June | \)35,000 |
July | \(45,000 |
August | \)45,000 |
September | \(55,000 |
October | \)85,000 |
November | \(105,000 |
December | \)123,000 |
Total annual sales | \(756,000 |
Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.
Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.
d. Prepare a monthly cash budget for January through December using the cash receipts schedule from part b and the cash payments schedule from part c. The beginning cash balance is \)5,000, which is also the minimum desired.
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