Solutions to CH 18, 20, 21, 26

Changes in the Cycles [LO1] Indicate the effect that the following will have on the cash cycle and the operating cycle
letter "I" to indicate an increase, the letter "D" for a decrease, and the letter "N" for no change:
Impact on
cash
cycle More finished goods are produced for inventory instead of for order.
A greater percentage of raw material purchases are paid for with credit.
Fewer raw materials than usual are purchased.
An increased number of customers begin to pay in cash instead of with credit.
Cash discounts offered by suppliers are decreased; so, payments are made earlier.
The terms of cash discounts offered to customers are made less favorable. Here are some important figures from the budget of
a retail company for the second quarter of 2015.
The company predicts that 4 percent of its credit
sales will never be collected, 36 percent of its sales
will be collected in the month of the sale, and the
remaining 60 percent will be collected in the
following month. Credit purchases will be paid in the
month following the purchase. credit sales
credit purchases
cash disbursements:
wages, taxes, and expenses
interest
equipment purchases Complete the Cash Budget for April, May
and June. Mar
242,000
163,500 Cash Budge
Mar
Beginning cash balance
current month cash receipts
cash collected for previous month sales
total cash available
cash disbursements:
purchases
wages, taxes, and expenses
interest
equipment purchases
total cash disbursements
ending cash balance cycle and the operating cycle. Use the
change:
Impact on
operating
cycle April
379,900
152,400 May
365,400
172,900 June
395,000
195,600 57,250
14,420
92,400 74,600
14,420
152,000 78,270
14,420
0 Cash Budget
April
185,000 May June Size of Accounts Receivable [LO1] A company sells on credit terms of net 30. Its accounts are, on average, six da
Annual credit sales are $10.25 million.
What is the company’s balance sheet amount in accounts receivable? Credit Policy Evaluation [LO2] A firm is considering a change in its cash-only policy. The new terms would be ne
Based on the following information, determine if the company should proceed or not. The required return is 2.5
period.
current
policy
price per unit
83
cost per unit
42
unit sales per month
3,630 new
policy
85
42
3,990 nts are, on average, six days past due. e new terms would be net one period.
The required return is 2.5 percent per Using Spot and Forward Exchange Rates [LO1]
Suppose the spot exchange rate for the Canadian dollar is Can$1.09 and the six-month forward rate is Can$1.11
Which is worth more, a U.S. dollar or a Canadian dollar?
Assuming absolute PPP holds, what is the cost in the United
States of an Elkhead beer if the price in Canada is Can$2.50?
Why might the beer actually sell at a different price in the
United States?
Is the U.S. dollar selling at a premium or a discount relative to
the Canadian dollar?
Which currency is expected to appreciate in value? Interest Rates and Arbitrage [LO2] The treasurer of a major U.S. firm has $20 million to invest for three months.
in the United States is 0.33 percent per month. The interest rate in Great Britain is 0.37 percent per month. The
rate is £0.575, and the three-month forward rate is £0.577. Ignoring transaction costs, in which country would th
to invest the company’s funds? Why?
Ignoring transaction costs, in which country would the treasurer want to invest the company’s funds? Why? forward rate is Can$1.11. o invest for three months. The interest rate
7 percent per month. The spot exchange
in which country would the treasurer want ompany’s funds? Why? Calculating Synergy [LO3] Pearl, Inc., has offered $542 million cash for all of the common stock in Jam Corporati
recent market information, Jam is worth $489 million as an independent operation. If the merger makes econom
Pearl, what is the minimum estimated value of the synergistic benefits from the merger? Balance Sheets for Mergers [LO2] Consider the following premerger information about Firm X and Firm Y. Assu
acquires Firm Y by paying cash for all the shares outstanding at a merger premium of $7.50 per share. Assumin
any debt before or after the merger, construct the postmerger balance sheet for Firm X assuming the use of pu
accounting. Total Earnings
Shares outstanding
Per-share values:
Market
Book Firm X
Firm Y
$ 95,000 $ 22,000
44,000
16,000
$
$ 62 $
9 $ 22
5 on stock in Jam Corporation. Based on
he merger makes economic sense for
er? t Firm X and Firm Y. Assume that Firm X
7.50 per share. Assuming neither firm has
X assuming the use of purchase