BUSI320 Corporate Finance2013 FallB Assignment 3
BUSI320 Corporate Finance
1.Problem 62 Expected value [LO6]
Sharpe Knife Company expects sales next year to be $1,540,000 if the economy is strong, $820,000 if the economy is steady, and $540,000 if the economy is weak. Mr. Sharpe believes there is a 25 percent probability the economy will be strong, a 60 percent probability of a steady economy, and a 15 percent probability of a weak economy. 
What is the expected level of sales for the next year? (Omit the “$” sign in your response.) 
Expected level of sales  $ [removed] 
2.Problem 64 External financing [LO1]
Antivirus, Inc., expects its sales next year to be $3,600,000. Inventory and accounts receivable will increase by $590,000 to accommodate this sales level. The company has a steady profit margin of 12 percent with a 30 percent dividend payout. 
How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. (Omit the “$” sign in your response.) 
External funds needed  $ [removed] 
3.Problem 66 Level versus seasonal production [LO1]
Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows: 
March  3,200 
April  7,200 
May  11,400 
June  9,400 


31,200  



If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory buildup. 
The production manager thinks the above assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,200 units over four months at a level of 7,800 per month. 
(a)  What is the ending inventory at the end of each month? (Leave no cells blank – be certain to enter “0” wherever required.) 
Ending inventory 

March  [removed] 
April  [removed] 
May  [removed] 
June  [removed] 

(b)  If the inventory costs $17 per unit and will be financed at the bank at a cost of 6 percent, what is the monthly financing cost and the total for the four months? (Use 0.5 percent as the monthly rate.) (Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) 
Inventory financing cost 

March  $ [removed] 
April  [removed] 
May  [removed] 
June  [removed] 


Total financing cost  $ [removed] 



rev: 01_07_2013
4.Problem 68 Shortterm versus longerterm borrowing [LO3]
Biochemical Corp. requires $530,000 in financing over the next three years. The firm can borrow the funds for three years at 11.60 percent interest per year. The CEO decides to do a forecast and predicts that if she utilizes shortterm financing instead, she will pay 8.25 percent interest in the first year, 12.75 percent interest in the second year, and 9.50 percent interest in the third year. 
(a)  Determine the total interest cost under each plan. (Omit the “$” sign in your response.) 
Interest cost  
Fixed cost financing  
Variable shortterm financing  

(b)  Which plan is less costly? 
5.Problem 69 Shortterm versus longerterm borrowing [LO3]
Stern Educational TV, Inc., has decided to buy a new computer system with an expected life of three years at a cost of $410,000. The company can borrow $410,000 for three years at 11 percent annual interest or for one year at 9 percent annual interest. 
(a)  How much would the firm save in interest over the threeyear life of the computer system if the oneyear loan is utilized, and the loan is rolled over (reborrowed) each year at the same 9 percent rate? Compare this to the 11 percent threeyear loan. (Omit the “$” sign in your response.) 
Amount  
9 Percent  
11 Percent  
Interest saving  

(b)  What if interest rates on the 9 percent loan go up to 14 percent in the second year and 17 percent in the third year? What would be the total interest cost compared to the 11 percent, threeyear loan? (Omit the “$” sign in your response.) 
Amount  
1^{st} year  
2^{nd} year  
3^{rd} year  
Extra interest cost  

6.Problem 610 Optimal policy mix [LO5]
Assume that Hogan Surgical Instruments Co. has $3,200,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 15 percent, but with a highliquidity plan, the return will be 11 percent. If the firm goes with a shortterm financing plan, the financing costs on the $3,200,000 will be 7 percent, and with a longterm financing plan, the financing costs on the $3,200,000 will be 9 percent. 
(a)  Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
(b)  Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
(c)  Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) 
Anticipated return  
Low liquidity  
High liquidity  

7.Problem 611 Optimal policy mix [LO5]
Assume that Atlas Sporting Goods, Inc., has $990,000 in assets. If it goes with a lowliquidity plan for the assets, it can earn a return of 16 percent, but with a highliquidity plan the return will be 13 percent. If the firm goes with a shortterm financing plan, the financing costs on the $990,000 will be 10 percent, and with a longterm financing plan, the financing costs on the $990,000 will be 12 percent. 
(a)  Compute the anticipated return after financing costs with the most aggressive assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
(b)  Compute the anticipated return after financing costs with the most conservative assetfinancing mix.(Omit the “$” sign in your response.) 
Anticipated return 
(c)  Compute the anticipated return after financing costs with the two moderate approaches to the assetfinancing mix. (Omit the “$” sign in your response.) 
Anticipated return 

Low liquidity  
High liquidity  

(d)  If the firm used the most aggressive assetfinancing mix described in part a and had the anticipated return you computed for part a, what would earnings per share be if the tax rate on the anticipated return was 30 percent and there were 20,000 shares outstanding? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) 
Earnings per share 
(e1)  Now assume the most conservative assetfinancing mix described in part b will be utilized. The tax rate will be 30 percent. Also assume there will only be 5,000 shares outstanding. What will earnings per share be? (Round your answer to 2 decimal places. Omit the “$” sign in your response.) 
Earnings per share 
(e2)  Would it be higher or lower than the earnings per share computed for the most aggressive plan computed in part d?  
8. Problem 612 Matching asset mix and financing plans [LO3]


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