6-4. Continued Solution: Madonna’ s Clothiers Units Units Change in Ending Produced Sold inventory Inventory October 50002,000+3,000 3.000 5.0004000 1000 4.000 December 5000800 3.000 1000 Ja anuar 50006,000 1,000 0 b E nouns g Cost per Inventory Inventory Unit(S7) Financing Cost October $3,000$2100 $1,680 Noⅴ ember 4.000 28.000 2,240 December 1,000 7,000 560 January 0 0 $4480 CopyrightC 2005 by The McGray-Hill Companies, Inc. -216
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-216 6-4. Continued Solution: Madonna’s Clothiers a. Units Produced Units Sold Change in inventory Ending Inventory October 5,000 2,000 +3,000 3,000 November 5,000 4,000 +1,000 4,000 December 5,000 8,000 –3,000 1,000 January 5,000 6,000 –1,000 0 b. Ending Inventory Cost per Unit ($7) Inventory Financing Cost October $3,000 $21,000 $1,680 November 4,000 28,000 2,240 December 1,000 7,000 560 January 0 0 0 $4,480
6 Procter Micro-Computers, Inc. requires $1, 200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest er year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly? Solution: Procter-Mini-Computers, Inc. Cost of Two year fixed Cost financing $1, 200,000 borrowed x.5% per annum x 2 years=$228, 000 interest Cost of Two Year Variable Short-term Financing Ist year $1,200,000x 6.55% per annum= $78,600 interest cost 2nd year $1, 200,000x 10.95% per annum=$131.400 interest cost $210,000 two-year total The short-term plan is less costl -217 Copyright C2005 by The McGra-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-217 6-5. Procter Micro-Computers, Inc. requires $1,200,000 in financing over the next two years. The firm can borrow the funds for two years at 9.5 percent interest per year. Mr. Procter decides to do economic forecasting and determines that if he utilizes short-term financing instead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in the second year. Determine the total two-year interest cost under each plan. Which plan is less costly? Solution: Procter-Mini-Computers, Inc. Cost of Two Year Fixed Cost Financing $1,200,000 borrowed x 9.5% per annum x 2 years = $228,000 interest cost Cost of Two Year Variable Short-term Financing 1 st year $1,200,000 x 6.55% per annum = $ 78,600 interest cost 2 nd year $1,200,000 x 10.95% per annum = $131,400 interest cost $210,000 two-year total The short-term plan is less costly
6-6 Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 cent annual intel How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over(reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan? Solution Sauer Food Company If Rates are Constant $150,000 borrowed x 8% per annum x 3 years $36000 interest cost $150,000 borrowed x 10% per annum x 3 years $45.000 interest cost $45,000-$36,000=$9,000 interest savings borrowing short-term If Short-term Rates Change I st year $150,000x.08=$12,000 2nd year $l50,000x.13=$19500 3rd year $150000x.18=$27000 Total=$58.500 $58, 500-$45,000=$13, 500 extra interest costs borrowing short- term CopyrightC 2005 by The McGray-Hill Companies, Inc. S-218
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-218 6-6. Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What is the total interest cost now compared to the 10 percent, three-year loan? Solution: Sauer Food Company If Rates Are Constant $150,000 borrowed x 8% per annum x 3 years = $36,000 interest cost $150,000 borrowed x 10% per annum x 3 years = $45,000 interest cost $45,000 – $36,000 = $9,000 interest savings borrowing short-term If Short-term Rates Change 1 st year $150,000 x .08 = $12,000 $150,000 x .13 = $19,500 $150,000 x .18 = $27,000 2 nd year 3 rd year Total = $58,500 $58,500 – $45,000 = $13,500 extra interest costs borrowing shortterm
Assume Stratton Health Clubs, Inc, has $3,000,000 in assets. If it goes with a low liquid ity plan for the assets, it can earn a return of 20 percent, but with a high liquid ity plan, the return will be 13 percent. If the firm goes with a short term financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,000,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem. a. Compute the anticipated return after financing costs on the most aggressive asset-financing mix b. Compute the anticipated return after financing costs on the most conservative asset-financing mix c. Compute the anticipated return after financing costs on the two moderate approaches to the asset-financing mix d. Would you necessarily accept the plan with the highest return after financing costs? briefly explain -219 Copyright C2005 by The McGra-Hill Companies, Inc
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-219 6-7. Assume Stratton Health Clubs, Inc., has $3,000,000 in assets. If it goes with a low liquidity plan for the assets, it can earn a return of 20 percent, but with a high liquidity plan, the return will be 13 percent. If the firm goes with a shortterm financing plan, the financing costs on the $3,000,000 will be 10 percent, and with a long-term financing plan, the financing costs on the $3,000,000 will be 12 percent. (Review Table 6-11 for parts a, b, and c of this problem.) a. Compute the anticipated return after financing costs on the most aggressive asset-financing mix. b. Compute the anticipated return after financing costs on the most conservative asset-financing mix. c. Compute the anticipated return after financing costs on the two moderate approaches to the asset-financing mix. d. Would you necessarily accept the plan with the highest return after financing costs? Briefly explain
6-7. Continued Solution: Stratton Health Clubs. Inc. a. Most aggressive ow liquidity/high return $3,000,000x20%=$600,000 Short-term financing 3000,000x10%=-300000 Anticipated return $300.000 b. Most conservative High liquidity/low return $3.000.000x13%=$390000 Long-term financing 3.000.000x12%=-360.000 Anticipated return $300 c. Moderate approach Low liquidity $3,000.000x20%=$600.000 Long-term financing 3.000.000x12%=-360.000 $240.000 High liquidity $3,000.000x13%=$390,000 Short-term financing 3000,000×10% 300.000 $90.000 d. You may not necessarily select the plan with the highest return You must also consider the risk inherent in the plan. Of course, some firms are better able to take risks than others The ultimate concern must be for maximizing the overall valuation of the firm through a judicious consideration of risk-return options CopyrightC 2005 by The McGray-Hill Companies, Inc. S-220
Copyright © 2005 by The McGraw-Hill Companies, Inc. S-220 6-7. Continued Solution: Stratton Health Clubs, Inc. a. Most aggressive Low liquidity/high return $3,000,000 x 20% = $600,000 Short-term financing –3,000,000 x 10% = –300,000 Anticipated return $300,000 b. Most conservative High liquidity/low return $3,000,000 x 13% = $390,000 Long-term financing –3,000,000 x 12% = –360,000 Anticipated return $ 30,000 c. Moderate approach Low liquidity $3,000,000 x 20% = $600,000 Long-term financing –3,000,000 x 12% = –360,000 $240,000 Or High liquidity $3,000,000 x 13% = $390,000 Short-term financing –3,000,000 x 10% = –300,000 $ 90,000 d. You may not necessarily select the plan with the highest return. You must also consider the risk inherent in the plan. Of course, some firms are better able to take risks than others. The ultimate concern must be for maximizing the overall valuation of the firm through a judicious consideration of risk-return options