fin362 exam3

Hoyes Lumber generally receives three checks a month in the amounts of $654, $987, and $1,310. The $987 check has a two-day collection delay while the others have a one-day delay. Given this information, what is the amount of the average daily float? Assume each month has 30 days.

$131 Average daily float = [1($654 + 1,310) + 2($987)]/30Average daily float = $131

On an average day, Plastics Enterprises writes 23 checks with an average amount of $842. These checks clear the bank in an average of three days. What is the average amount of the disbursement float?

$58,098 Disbursement float = 23($842)(3)Disbursement float = $58,098

B&C Co. has an average receipt size of $249. A lockbox service should decrease the average total collection time by 1.6 days at a cost of $95 per day. The company typically receives 2,150 checks per day. The daily Treasury interest rate is .012 percent. What is the NPV of the lockbox project?

$64,893 NPV of service = $249(2,150)(1.6) − ($95/.00012)NPV of service = $64,893

Lasko's Mart has an available balance of $2,315. A deposit of $789 was made this morning and is included in the bank's balance. There are three checks outstanding with a value of $289 each. What is the net float?

$867 Net float = 3($289)Net float = $867

Quest is considering a change in its cash-only sales policy. The new terms of sale would be net one month. The required return is .98 percent per month. Currently, the firm sells 420 units per month at $736 per unit. Under the new policy, the firm expects sales of 475 units also at $736 per unit. The variable cost per unit is $426. What is the NPV of switching?

$1,407,246 NPV of switching = −[$736(420) + $426(475 − 420)] + [($736 − 426)(475 − 420)]/.0098NPV of switching = $1,407,246

Cross Trucking provides services exclusively for three customers. The monthly amounts paid by these customers along with their respective collection delays are: $81,900 with 1.5 days, $47,300 with 2 days, and $68,400 with 2.5 days. Given this information, what is the weighted average delay?

1.97 days Total monthly collections = $81,900 + 47,300 + 68,400Total collections = $197,600Weighted average delay = 1.5($81,900/$197,600) + 2($47,300/$197,600) + 2.5($68,400/$197,600)Weighted average delay = 1.97 days

A firm offers credit terms of 2/15, net 45. What effective annual interest rate does the firm earn when a customer forgoes the discount?

27.86 percent EAR = [1 + (.02/.98)]365/(45 − 15) − 1EAR = .2786, or 27.86%

Money market securities generally have which of the following characteristics?

High liquidity, low risk, low return

U.S. dollars deposited in a bank in Switzerland are called:

Eurocurrency.

Assume the euro is selling in the spot market for $1.15. Simultaneously, in the three-month forward market the euro is selling for $1.17. Which one of the following statements correctly describes this situation?

The euro is selling at a premium relative to the dollar.

Which one of the following states that the expected percentage change in the exchange rate between two countries is equal to the difference in the countries' interest rates?

Uncovered interest parity

A just-in-time inventory system:

focuses on immediate production needs.

A trader has just agreed to exchange British pounds for French francs three months from today. This exchange is an example of a

forward trade.

The condition stating that the interest rate differential between two countries is equal to the percentage difference between the forward exchange rate and the spot exchange rate is called

interest rate parity.

The EOQ model is designed to determine how much:

inventory should be purchased at one time.

A 2/10, net 30 credit policy:

is an expensive form of short-term credit if a buyer forgoes the discount.

A lockbox is a:

post office box strategically located so that a company's receivables can be collected faster.

Relative purchasing power parity:

relates differences in inflation rates to differences in exchange rates.

Brown Trucking is buying a U.S. Treasury bill today with the understanding that the seller will buy it back tomorrow at a slightly higher price. This investment is known as a:

repurchase agreement.

The average collection period

the percentage of accounts taking the discount times the discount period, plus the percentage of accounts not taking the discount times the days until full payment is required

six-month risk-free rate

RFC = (Ft - S0)/S0 + RUS

You can make a one-time sale if you will grant a new customer 30 days to pay. This customer wants to purchase an item with a sales price of $499 and a variable cost of $287. You estimate the probability of default at 33 percent. The monthly interest rate is .98 percent. Should you grant credit to this customer? Why or why not?

Yes; because the NPV of the potential sale is $44.09 NPV = −$287 + (1 − .33)($499/1.0098)NPV = $44.09

Assume the current spot rate is C$1.2568 and the one-year forward rate is C$1.2455. Also assume the nominal risk-free rate in Canada is 3.7 percent compared to 4.1 percent in the U.S. Using covered interest arbitrage, how much additional profit can you earn over that which you would earn if you invested $1 in the U.S for one year?

$.0054 Arbitrage profit = [$1(C$1.2568)(1.037)($1/C$1.2455)] − $1(1.041)Arbitrage profit = $.0054

If Merilee Industries installs a lockbox system it should reduce its average collection time by 2.2 days at a cost of $.75 per check. On an average day, 594 checks with an average value of $4,618 each are received. The daily interest rate on Treasury bills is .009 percent. What is the net present value of this lockbox arrangement?

$1,084,802 NPV = 594($4,618)(2.2) − [594($.75)]/.00009NPV = $1,084,802

On average, CT Motors has daily credit sales of $42,390, an inventory period of 53 days, and a collection period of 26 days. What is the average accounts receivable balance?

$1,102,140 A/R balance = $42,390(26)A/R balance = $1,102,140

Home Accents currently sells 219 units a month at a price of $46 a unit. If it switches to a net 30 credit policy, monthly sales are expected to increase by 28 units. The monthly interest rate is .57 percent and the variable cost per unit is $21. What is the net present value of the proposed credit policy switch?

$112,145 NPV of switch = −[$46(219) + $21(28)] + [($46 − 21)(28)]/.0057NPV of switch = $112,145

Hot Tub Builders sells to three retail dealers under an agreement wherein each dealer pays monthly. The average payments are $148,500, $162,900, and $74,500 from these dealers. Each payment has a collection delay of 1.5 days. What is the amount of the average daily receipts assuming each month has 30 days?

$12,863 Average daily receipts = ($148,500 + $162,900 + $74,500)/30Average daily receipts = $12,863

The Hobby Shop has a checking account with an available balance of $617 and a check book balance of $702. There are $238 in uncollected deposits. What is the amount of the disbursement float on this account?

$153 Disbursement float = $617 + 238 − 702Disbursement float = $153

Assume an average selling price of $547 per unit, a variable cost per unit of $339, a monthly interest rate of 1.1 percent, and a default rate of 3.1 percent. What is the NPV of extending credit for 30 days to all who are expected to become repeat customers?

$17,984 NPV = −$339 + (1 −.031)[($547 − 339)/.011]NPV = $17,984

Roger's Distributors receives an average of 82 checks a day with an average check amount of $16,329. If a lockbox system is implemented the average collection time should decrease by an average of 1.7 days. The daily interest rate on Treasury bills is .009 percent. What is the amount of the expected daily savings of the lockbox system?

$204.86 Daily savings = 82($16,329)(1.7)(.00009)Daily savings = $204.86

Assume a sales price of $119 per unit, a $76 per unit variable cost, an average default rate of 3 percent, and a monthly interest rate of 1.25 percent. What is the net present value of a new repeat customer who never defaults on his or her payment?

$3,364 NPV = −$76 + 1[($119 − 76)]/.0125]NPV = $3,364

Global Markets receives an average of 122 checks a day with an average amount of $498 per check. The installation of a lockbox system should reduce the average collection time by 3.1 days at a cost of $.32 per check. The daily interest rate on Treasury bills is .012 percent. What is the average daily cost of the lockbox system?

$39.04 Daily cost = 122($.32)Daily cost = $39.04

Global Inc. just placed an order for 25,000 units at a cost of 162 Singapore dollars each, which will be payable when the shipment arrives in 120 days. Global sells these units at $148 each. The spot exchange rate is S$1.2537. What will the profit be on this order if the exchange rate increases to S$1.2602 over the next 120 days?

$486,224 Profit = 25,000[$148 − S$162($1/S$1.2602)]Profit = $486,224

On an average day, BJ Footwear receives $26,482 in checks from customers. These checks clear the bank in an average of 1.3 days. The applicable daily interest rate is .016 percent. What is the highest daily fee that should be paid to completely eliminate the collection float? Assume each month has 30 days.

$5.51 Maximum daily fee = $26,482(1.3)(.00016)Maximum daily fee = $5.51

you need to charge your purchases and know that you will not be able to pay within the discount period. Which one of these credit terms is best-suited to you?

1/10, net 45

Lakeside Market sells 848 units of an item priced at $49 each year. The carrying cost per unit is $2.26 and the fixed costs per order are $46. What is the economic order quantity?

186 units EOQ = [2(848)($46)/$2.26].5EOQ = 186 units

Assume the spot rate for the Japanese yen currently is ¥102.32 per $1 and the one-year forward rate is ¥102.69 per $1. A risk-free asset in Japan is currently earning 2.5 percent. If interest rate parity holds, approximately what rate can you earn on a one-year risk-free U.S. security?

2.14 percent (¥102.69 − ¥102.32)/¥102.32 = .025 − RUSRUS = .0214, or 2.14%

Assume you put your purchases on your credit card and then take advantage of any cash discounts offered. Which one of these credit terms do you prefer?

2/15, net 30

Assume $1 is currently equal to A$1.2924 in the spot market. Also assume the expected inflation rate in Australia is 2.8 percent as compared to 2.4 percent in the U.S. What is the expected exchange rate one year from now if relative purchasing power parity exists?

A$1.2976 E(S1) = A$1.2924[1 + (.028 − .024)]E(S1) = A$1.2976

Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate three-year forward rate if interest rate parity holds?

C$1.2482 F3 = C$1.2633[1 + (.037 − .041)]3F3 = C$1.2482

Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year forward rate will create interest rate parity?

C$1.2709 F1/C$1.2648 = 1.038/1.033F1 = C$1.2709

Currently, $1 will buy C$1.1028 while $1.2334 will buy €1. What is the exchange rate between the Canadian dollar and the euro?

C$1.3602 = €1 Cross rate = (C$1.1028/$1)($1.2334/€1)Cross rate = C$1.3602/€1

The camera you want to buy costs $495 in the U.S. How much will the identical camera cost in Canada if the exchange rate is C$1 = $.9128? Assume absolute purchasing power parity exists.

C$542 Cost = $495(C$1/$.9128)Cost = C$542

the cash flow from switching, which is a perpetuity, is:

Cash flow from new policy = [Q′(P′ − v′) - Q(P − v)]

the cost of switching credit policies is:

Cost of new policy = −[PQ + Q(v′ − v) + v′(Q′ − Q)]

International bonds issued in multiple countries but denominated in a single currency are called:

Eurobonds.

The LIBOR is primarily used as the basis for the rate charged on:

Eurodollar loans in the London market.

Which one of the following statements is correct if you purchase an item with credit terms of 3/15, net 45?

If you pay within 15 days, you will receive a discount of 3 percent.

Which one of the following supports the idea that real interest rates are equal across countries?

International Fisher effect

Which two of the following are key reasons why companies temporarily accumulate large cash surpluses?

Large planned expenditures and cyclical activities

On Friday evening, Bank A loans Bank B Eurodollars that must be repaid the following Monday morning. Which one of the following is most likely the interest rate that will be charged on this loan?

London Interbank Offer Rate

Assume that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127

Purchasing power parity

customer becomes a repeat customer, what is the break-even probability of default?

The cash inflow is now one minus the default probability, times the sales price minus the variable cost. We need to use the sales price minus the variable cost since we will have to build another engine for the customer in one period. Additionally, this cash inflow is now a perpetuity

NPV per unit

The cash outlay for the credit decision is the variable cost of the engine. If this is a one-time order, the cash inflow is the present value of the sales price of the engine times one minus the default probability

daily cost of float

The daily cost of float is the average daily float times the daily interest rate

Which one of the following statements is correct?

The money market refers to securities that mature in one year or less.

A firm's total investment in accounts receivables depends primarily on the firm's:

average collection period and amount of credit sales.

Collection float:

can be avoided by collecting payments electronically at the time of sale.

The basic factors to be evaluated in the credit evaluation process, the five Cs of credit, are:

capacity, character, collateral, capital, and conditions.

At the optimal order quantity size, the:

carrying costs equal the restocking costs.

Any written proof that a customer owes you money for goods or services provided is referred to as a(n):

credit instrument.

The primary purpose of credit analysis is to:

evaluate whether or not a customer will pay.

Disbursements float

is eliminated when payments are made electronically.

A cash concentration account:

is frequently used as a source of funds for short-term investments.

PV of adopting new system

is the number of days collections are reduced times the average daily collections, so:

NPV of adopting new system

is the present value of the savings minus the cost of adopting the system. The cost of adopting the system is the present value of the fee per transaction times the number of transactions. This is a perpetuity

net cash flow per day from adopting the lockbox system? Per check?

net cash flow per day is the present value of adopting the system times the daily interest rate, minus the transaction cost per day The net cash flow per check is the net cash flow per day divided by the number of checks received per day,

The EOQ model is designed to minimize:

the total costs of holding inventory.

break-even probability of default, π

we use the NPV equation from part a, set it equal to zero, and solve for π

An account into which funds are deposited only in an amount equal to the value of the checks presented for payment that day is called a _____ account.

zero-balance

How many euros can you get for $3,800 if one euro is worth $1.2987?

€2,926 Number of euros = $3,800(€1/$1.2987)Number of euros = €2,926