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Chapter 3: Q. 2DQ (page 182)
Discuss the relative volatility of short- and long-term interest rates.
Short-term interest rates are more volatile than long-term interest rates.
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Bombs Away Video Games Corporation has forecasted the following monthly sales:
January | \(100,000 |
February | \)93,000 |
March | \(25,000 |
April | \)25,000 |
May | \(20,000 |
June | \)35,000 |
July | \(45,000 |
August | \)45,000 |
September | \(55,000 |
October | \)85,000 |
November | \(105,000 |
December | \)123,000 |
Total annual sales | \(756,000 |
Bombs Away Video Games sells the popular Strafe and Capture video game. It sells for \)5 per unit and costs \(2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.
Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.
c. Determine a cash payments schedule for January through December. The production costs of \)2 per unit are paid for in the month in which they occur. Other cash payments, besides those for production costs, are $45,000 per month.
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
e. What additional information does the aging schedule bring to the company that the average collection period may not show?
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
b. If the firm had $1,500,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.
Using the expectations hypothesis theory for the term structure of interest rates, determine the expected return for securities with maturities of two, three, and four years based on the following data. Do an analysis similar to that in Table 6-6.
1-year T bill at the beginning of year 1 | 6% |
1-year T bill at the beginning of year 2 | 7% |
1-year T bill at the beginning of year 3 | 9% |
1-year T bill at the beginning of year 4 | 11% |
Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.
a. If Neon Light Company has \(2.25 million per day in collections and \)1.05 million per day in disbursements, how many dollars will the cash management system free up?
b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?
c. If the total cost of the new system is $400,000, should it be implemented?
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