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Chapter 3: Q9DQ (page 182)
What are three theories for describing the shape of the term structure of interest rates (the yield curve)? Briefly describe each theory.
There are three theories for describing the yield curve’s shape, expectations theory, liquidity-preference, and hedging pressure theories.
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Colter Steel has \(4,200,000 in assets.
Temporary current assets | \)1,000,000 |
Permanent current assets | \(2,000,000 |
Fixed assets | \)1,200,000 |
Total assets | \(4,200,000 |
Short-term rates are 8 percent. Long-term rates are 13 percent. Earnings before interest and taxes are \)996,000. The tax rate is 40 percent. If long-term financing is perfectly matched (synchronized) with long-term asset needs, and the same is true of short-term financing, what will earnings after taxes be? For a graphical example of perfectly matched plans, see Figure 6-5.
A firm that uses short-term financing methods for a portion of permanent current assets is assuming more risk but expects higher returns than a firm with a normal financing plan. Explain.
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.
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 | \(756,000 |
Bombs Away Video Games sells the popular Strafe and Capture video games. It sells for \)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.
a. Construct a monthly production and inventory schedule in units. Beginning inventory in January is 25,000 units. (Note: To do part a, you should work in terms of units of production and units of sales.)
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 \(2 per unit to produce. A level production policy is followed. Each month’s production is equal to annual sales (in units) divided by 12.
Of each month’s sales, 30 percent are for cash and 70 percent are on account. All accounts receivable are collected in the month after the sale is made.
b. Prepare a monthly schedule of cash receipts. Sales in the December before the planning year are \)100,000. Work part b using dollars.
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