# Timber Company Case Study

136751 Words 548 Pages
Register to read the introduction… Promptly’s cost of not taking the cash discount?

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 %
\$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

## Related Documents

• ###### The Importance Of Accounting And Finance

this essay, I will explore what accounting and finance is and why I have chosen to study it at the University of Birmingham. Accounting and finance are two separate disciplines that have some similar characteristics. The main difference between accounting and finance is that finance focuses on the present and future whereas accounting focuses on the past (Aspillera, 2014). The University of Birmingham is amongst the top providers for accounting and finance due to its credibility, infrastructure and status…

Words: 1519 - Pages: 7
• ###### The Importance Of Family Finances

Why is it important for women to know the family finances. In these complex economic times, keeping one’s finances in order is more important than ever. This is especially important for women because we face unique challenges that add up to different financial needs. At some point in your life, you will be solely responsible for your finances, whether you are single, married, divorced, or widowed. Women generally live longer than men, so we need to save more for retirement. We need to start investing…

Words: 1364 - Pages: 6
• ###### The Potential Benefits Of Solutions For Finance In The Finance Department

solutions for finance that are available by SAP. For each solution, these benefits will be analyzed and I will determine if I agree with the procedures and explain why or why not. Lastly, information from the previous assignment will be used and a determination whether or not this enterprise module will be useful to my organization. Definitions First, before we can get into evaluating the solutions that are provided by SAP for the finance department, we must understand the roles of finance in any business…

Words: 825 - Pages: 4