FIN 200: Assignment Workbook Week 9 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 9 Solution

Week 9 Checkpoint: Time Value of Money

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You must use the Present Value and Future Value Appendixes in your textbook in order to receive credit. You must also show your work.

1 What is the present value of:
a . $25,000 in 7 years at 8 percent?
b . $37,500 in 5 years at 10 percent?
c . $19,000 in 25 years at 6 percent?
d . $1,000,000 in 50 years at 16 percent?

2 Your aunt offers you a choice of:

Amount $ 60,000 in 40 years
Or
$ 850 today
Discount Rate 11%

From a pure financial perspective, which should you choose?

3 You invest a single amount of:
$ 15,000 for 5 years at 10%.
At the end of 5 years you take the proceeds and invest them for 12 years at 15
percent. How much will you have after 17 years?

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FIN 200: Assignment Workbook Week 7 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 7 Solution

Week 7 Assignment: Loan Scenarios

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The Niara Corporation is negotiating a loan from Manhattan Bank and Trust. The financial details are as follows:

Niara needs to borrow: $ 600,000
Bank Rate 7.00%
Compensating Balance 12%
Term (yrs) 1

Or

Bank Rate 9.00%
Fees $ 1 2,000
Term (yrs) 1

In either case the rate on the loan is floating (changes as the prime interest rate changes).

a. Which loan carries the lower effective rate? Consider fees to be the equivalent of other interest.
b. If the loan with a compensating balance requirement were to be paid off in 12 monthly payments, what would the effective rate be? (Principal equals amount borrowed minus the compensating balance.)
c. Assume the proceeds from the loan with the compensating balance requirement will be used to take cash discounts.
Disregard part b about installment payments and use the loan cost from part a.
If the terms of the cash discount are 1.5/10, net 50, should the firm borrow the funds to take the discount?
d. Assume the firm actually takes 80 days to pay its bills and would continue to do so in the future if it did not take the cash discount. Should the company take the cash discount?
e. Because the interest rate on the loans is floating, it can go up as interest rates go up. Assume that the
prime rate goes up by 2 percent and the quoted rate on the loan goes up the same amount.
What would then be the effective rate on the loan with compensating balances?
Convert the interest to dollars as the first step in your calculation.
f. In order to hedge against the possible rate increase described in part e, the The Niara Corporation decides to hedge its position in the futures market. Assume it sells $500,000 worth of 12‐month futures contracts on Treasury bonds.
One year later, interest rates go up 2 percent across the board and the Treasury bond futures have gone down to $485,000.
Has the firm effectively hedged the 2 percent increase in interest rates on the bank loan as described in part e?
Determine the answer in dollar amounts.
You must show your work to get credit.

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FIN 200: Assignment Workbook Week 6 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 6 Solution

Week 6 Checkpoint: Credit Policy Decisions

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The Niara Corporation Office Supplies division is considering a more liberal credit policy to increase sales. Pertinant financial data follows:

Uncollectible Accounts 9%
Collection Costs (% of new sales) 6%
Production and Selling Costs (% of new sales) 65%
Accounts Receivable Turnover 3
Inventory Turnover 5
Income Taxes 35%
Sales Increase $ 45,000
No other asset buildup will be required to service the new accounts

a. What is the level of accounts receivable to support this sales expansion?
b. What would be The Niara Corporation’s incremental aftertax return on investment?
c. Should The Niara Corporation liberalize credit if a 15 percent aftertax return on investment is required?
d. What would be the total incremental investment in accounts receivable and inventory to support an increase in sales?
e. Given the income determined in part b and the investment determined in part d, should The Niara Corporation extend more liberal credit terms?

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FIN 200: Assignment Workbook Week 5 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 5 Solution

Week 5 Assignment: Alternative Financing Plans

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The Niara Corporation has the following financials:
Permanent Current Assets $ 675,000
Total Current Assets $ 905,000
Fixed Assets $ 550,000
Long‐term Financing Cost 9%
Short‐term Financing Cost 2%
EBIT $ 330,000
Tax Rate 40%

Please note that Permanent Current Assets plus Temporary Current Assets equal Total Current Assets. Please assume that all Current Assets are either financed long term or short term.

a. The Niara Corporation wishes to finance all fixed assets and half of its permanent current assets with long‐term financing. Determine The Niara Corporation’s earnings after taxes under this financing plan.
b. As an alternative, The Niara Corporation might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long‐term financing. What will be the Niara Corporation’s earnings after taxes?
c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

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FIN 200: Assignment Workbook Week 4 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 4 Solution

Week 4 Checkpoint: Breakeven Analysis

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A business unit of The Niara Coporation sells beans to the military. The following is the associated financial data:

Quantity (Q) 25 lb
Sales Price (P) $ 8 per bag
Fixed Costs (FC) $ 75,000
Variable Costs (VC) $ 0.07 per pound
Interest Expense (I) $ 8,000

a . What is the break‐even point in bags?
b . Calculate the profit or loss on:
7,500 bags
15,000 bags
c. Calculate the degree of operating leverage at:
15,000 bags
24,000 bags
Why does the degree of operating leverage change as the quantity sold increases?
d. Calculate the degree of financial leverage at both sales levels in question c.
e. What is the degree of combined leverage at both sales levels in question c?
You must show your work to receive credit.

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FIN 200: Assignment Workbook Week 3 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 3 Solution

Week 3 Assignment: Pro Forma Financial Statements

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The Niara Corporation
The balance sheet items of The Niara Corporation that vary directly with sales and the profit margin are as follows:

Percent
Cash 9%
Accounts receivable 11%
Inventory 22%
Net fixed assets 32%
Accounts payable 12%
Accruals 9%
Profit margin after taxes 5%

2009 Sales $2,200 thousand
2010 Sales Increase 14%
Dividend Payout Ratio 40%
2009 Retained Earnings Balance 620.00 thousand
Common Stock 120.00 thousand
Long Term Bonds 80.00 thousand
Notes Payable 346.00 thousand

You must show your work in order to receive credit
a . How much additional external capital will be required for next year given the sales increase as noted above? (Assume that the company is already operating at full capacity.)
b . What will happen to external fund requirements if The Niara Corporation reduces the payout ratio, grows at a slower rate, or suffers a decline in its profit margin? Discuss each of these separately.
c. Prepare a pro forma balance sheet for 2010 assuming that any external funds being acquired will be in the form of notes payable. Disregard the information in part b in answering this question (that is, use the original information and part a in constructing your pro forma balance sheet).

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FIN 200: Assignment Workbook Week 2 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 2 Solution

Week 2 CheckPoint: Financial Ratios

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Using the financial statements for The Niara Corporation, calculate the 13 basic ratios found in the chapter.
You must show your work to get credit.

Niara Corporation
Income Statement
For the Year Ended December 31, 2009
Sales $ 2,200,000
Cost of goods sold 1,300,000
Gross profits 900,000
Selling and administrative expense 420,000
Depreciation expense 150,000
Operating income 330,000
Interest expense 90,000
Earnings before taxes 240,000
Taxes 80,000
Earnings after taxes 160,000
Preferred stock dividends 10,000
Earnings available to common stockholders $ 150,000
Shares outstanding 120,000
Earnings per share $1.25

Statement of Retained Earnings
For the Year Ended December 31, 2009
Retained earnings, balance, January 1, 2009 $ 500,000
Add: Earnings available to common stockholders, 2009 150,000
Deduct: Cash dividends declared and paid in 2009 30,000
Retained earnings, balance, December 31, 2009 $ 620,000

Niara Corporation
Balance Sheet
December 31, 2009
Year‐End
Assets 2009
Current assets:
Cash $ 135,000
Accounts receivable (net) 340,000
Inventory 405,000
Prepaid expenses 25,000
Total current assets 905,000
Investments (long‐term securities) 50,000
Plant and equipment 2,450,000
Less: Accumulated depreciation 1,150,000
Net plant and equipment 1,300,000
Total assets $ 2,255,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 475,000
Notes payable 400,000
Accrued expenses 60,000
Total current liabilities 935,000
Long‐term liabilities:
Bonds payable, 2009 80,000
Total liabilities 1,015,000
Stockholders’ equity:
Preferred stock, $100 par value 90,000
Common stock, $1 par value 120,000
Capital paid in excess of par 410,000
Retained earnings 620,000
Total stockholders’ equity 1,240,000
Total liabilities and stockholders’ equity $ 2,255,000

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FIN 200: Assignment Workbook Week 1 Solution

FIN 200

Axia College of University of Phoenix (UoP)

Introduction to Finance: Harvesting the Money Tree

Finance 200 Assignment Workbook Week 1 Solution

Week 1 Assignment: Cash Flow Preparation

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Prepare a statement of cash flows for The Niara Corporation.
Follow the general procedures indicated in Table 2–10 on page 38 in your textbook.
You must show your work in order to receive credit.

Niara Corporation
Income Statement
For the Year Ended December 31, 2009
Sales $ 2,200,000
Cost of goods sold 1,300,000
Gross profits 900,000
Selling and administrative expense 420,000
Depreciation expense 150,000
Operating income 330,000
Interest expense 90,000
Earnings before taxes 240,000
Taxes 80,000
Earnings after taxes 160,000
Preferred stock dividends 10,000
Earnings available to common stockholders $ 150,000
Shares outstanding 120,000
Earnings per share $1.25

Statement of Retained Earnings
For the Year Ended December 31, 2009
Retained earnings, balance, January 1, 2009 $ 500,000
Add: Earnings available to common stockholders, 2009 150,000
Deduct: Cash dividends declared and paid in 2009 30,000
Retained earnings, balance, December 31, 2009 $ 620,000

Comparative Balance Sheets
For 2008 and 2009
Year‐End Year‐End
Assets 2008 2009
Current assets:
Cash $ 80,000 $ 135,000
Accounts receivable (net) 310,000 340,000
Inventory 400,000 405,000
Prepaid expenses 55,000 25,000
Total current assets 845,000 905,000
Investments (long‐term securities) 85,000 50,000
Plant and equipment 2,000,000 2,450,000
Less: Accumulated depreciation 1,000,000 1,150,000
Net plant and equipment 1,000,000 1,300,000
Total assets $ 1,930,000 $ 2,255,000
Current liabilities:
Accounts payable $ 275,000 $ 475,000
Notes payable 400,000 400,000
Accrued expenses 65,000 60,000
Total current liabilities 740,000 935,000
Long‐term liabilities:
Bonds payable, 2009 70,000 80,000
Total liabilities 810,000 1,015,000
Stockholders’ equity:
Preferred stock, $100 par value 90,000 90,000
Common stock, $1 par value 120,000 120,000
Capital paid in excess of par 410,000 410,000
Retained earnings 500,000 620,000
Total stockholders’ equity 1,120,000 1,240,000
Total liabilities and stockholders’ equity $ 1,930,000 $ 2,255,000

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