8-18. Solution:
Paul Promptly
360
Cost of not taking = Discount % a cash discount
100% Disc.% Payment date
Discount period
3%
360
100% 3% 60 10
3.09% 7.2 22.25%
In this problem, Mr. Promptly has the use of funds for 50 extra days (60-10), instead of 60 extra days (70-10). Mr. Promptly’s suppliers are offering terms of 3/10, net 70. Mr. Promptly is effectively accepting terms of 3/10, net 60.
S8-17
19.
The Ogden Timber Company buys from its suppliers on terms of 2/10, net 35. Ogden has not been utilizing the discount offered and has been taking 50 days to pay its bills. The suppliers seem to accept this payment pattern, and Ogden’s credit rating has not been hurt.
Mr. Wood, Ogden Timber Company’s vice-president, has suggested that the company begin to take the discount offered. Mr. Wood proposes that the company borrow from its bank at a stated rate of 15 percent. The bank requires a 25 percent compensating balance on these loans. Current account balances would not be available to meet any of this compensating balance requirement. Do you agree with Mr. Wood’s proposal?
8-19. Solution:
The Ogden Timber Company
360
Cost of not taking a cash = Discount % …show more content…
$6
.3..........................
10
.2..........................
16
.2..........................
25
a.
b.
c.
d.
e.
f.
g.
American Micro-Technology (AMT) (cost
$75 million)
Probability
Aftertax Cash Flows for 10 Years
($ millions)
.2........................
$(1)
.2........................
3
.2........................
10
.3........................
25
.1........................
31
What is the expected cash flow for each company?
Which company has the lower coefficient of variation?
Compute the net present value of each company.
Which company would you pick, based on net present values?
Would you change your mind if you added the risk dimensions to the problem? Explain.
What if Computer Whiz Company had a correlation coefficient with the economy of
+.5 and American Micro-Technology had one of –.1? Which of the companies would give you the best portfolio effects for risk reduction?
What might be the effect of the acquisitions on the market value of Tobacco
Company’s stock?
S13-43
CP 13-1
Solution:
Tobacco Company of America
a. Computer Whiz Company
American Micro-Technology
P × Cash Flow
.3
$6.0 Million
.3
10.0
.2
16.0
.2
25.0
$1.8 Million
3.0
3.2
5.0
Expected Value
$13.0
P × Cash Flow
.2 ($1.0