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A bank offers a client a choice between two financing options for a one-year period: Option1: a term-loan for the full year of $500,000 to be repaid at the end of the year with interest fixed at 12% per year. Option 2: An overdraft, with a quoted rate of 14% per year, with interest charged quarterly on the average balance. The firm expects to need finance, on average, $400,000 in the first quarter, $500,000 in quarter 2, $500,000 in quarter 3 and only $200,000 in the final quarter due to the seasonal nature of its business. Unused funds can be invested at 2% per quarter (compounded quarterly). The bank will however not charge interest on accumulated quarterly interest charges (simple interest only). Which option would you recommend to the client? Support your answer with detailed computations.
A local engineering firm just bought a new office building (CCA=4%) for $500,000. Useful life of 30 years is expected with no salvage value. If tax rate is 40%, and required rate is 10%, then what is the present value of this building's tax shields?
Matthews Manufacturing is negotiating a 1-year credit line with its bank, Worldwide Bank. The amount of the credit line is $6.5 million with an interest rate set at 2.5% above the prime rate. What effect would an increase in the prime rate to 4.75% f..
Accurately derived the formula to determine the increase in the annual after-tax profits by selecting the optimal transfer price and accurately calculated the optimal transfer price.
P15–5 EOQ analysis Tiger Corporation purchases 1,200,000 units per year of one component. The fixed cost per order is $25. The annual carrying cost of the item is 27% of its $2 cost. Determine the EOQ if (1) the conditions stated above hold, (2) the ..
Come and Go Bank offers your firm a discount interest loan with an interest rate of 8 percent for up to $24 million, and in addition requires you to maintain a 1 percent compensating balance against the face amount borrowed. What is the effective ann..
A supplier is offering your firm a cash discount of 2 percent if purchases are paid for within ten days; otherwise, the bill is due at the end of sixty days. Would you recommend borrowing from a bank at an 18 percent annual interest rate to take adva..
You’ve observed the following returns on Crash-n-Burn Computer’s stock over the past five years: 14 percent, –7 percent, 17 percent, 15 percent, and 10 percent. Suppose the average inflation rate over this period was 1.4 percent and the average T-bil..
Dewey Cheetham and Howe Accounting firm is considering the purchase of $1,000 New Haven Muncipal Bond. The stated coupon rate is 5%, paid quarterly. The bond will matuure in 22 years. The YTM for similar bonds is 4%. What should be the market price b..
Use the following corporate bond quote information to answer the questions that follows. since this is a corporate bond, assume the company makes semi-annual coupon payments and also assume the bond matures on today's date in its maturity year. What ..
Young's free cash flow during the just-ended year (t=0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the value of the firm's operations?
We are evaluating a project that costs $1,180,000, has a ten-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. alculate the base-case cash flow and NPV. What is the sensitivity of NPV..
The Cosmo K Manufacturing Group currently has sales of $1,400,000 per year. It is considering the addition of a new office machine, which will not result in any new sales but will save the company $105,500 before taxes per year over its 5-year useful..
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