"6-14. (Continued)b. Alternative financing planShort-term interest expense = 5% [½ ($450,000)] = 5% ($225,000) = $11,250Long-term interest expense = 10% [$600,000 + $350,000+ ½ ($450,000)] = 10% ($1,175,000) = $117,500Total interest expense =$11,250 + $117,500 =$128,750Earnings before interest and taxes $200,000Interest expense 128,750Earnings before taxes $71,250Taxes (30%)21,375Earnings after taxes $ 49,875c. The alternative financing plan which calls for more financingby high-cost debt is more expensive and reduces aftertaxincome by $14,000. However, we must not automaticallyreject this plan because of its higher cost since it has less risk.The alternative provides the firm with long-term capitalwhich at times will be in excess of its needs and invested inmarketable securities. It will not be forced to pay highershort-term rates on a large portion of its debt when short- term rates rise and will not be faced with the possibility of noshort-term financing for a portion of its permanent currentassets when it is time to renew the short-term loan.S6-19 15.Using the expectations hypothesis theory for the term structure of interest rates, determinethe expected return for securities with maturities of two, three, and four years based on thefollowing data. Do an analysis similar to that in Table 6-6.1-year T-bill at beginning of year 1 6%1-year T-bill at beginning of year 2 7%1-year T-bill at beginning of year 3 9%1-year T-bill at beginning of year 4 11%6-15. Solution:2 year security (6% + 7%)/2 = 6.5%3 year security (6% + 7% + 9%)/3 = 7.33%4 year security (6% + 7% + 9% + 11%)/4 = 8.25%16.Modern Tombstones has estimated monthly financing requirements for the next six monthsas follows:January ................. $20,000 April .................. $10,000February ............... 6,000 May ................... 22,000March ................... 8,000 June ................... 12,000 Short-term financing will be utilized for the next six months. Projected annual interest rates are:January ................. 9.0% April .................. 15.0%February ............... 8.0% May ................... 12.0%March ................... 12.0% June ................... 9.0%a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12.b. If long-term financing at 12 percent had been utilized throughout the six months, wouldthe total dollar interest payments be larger or smaller?S6-20 6-16. Solution:Modern Tombstonesa. Short-term financingOn Monthly ActualMonth Rate Basis Amount InterestJanuary 9% .75% $20,000 $150.00February 8% .67% $ 6,000 $40.20March 12% 1.00% $ 8,000 $80.00April 15% 1.25% $10,000 $125.00May 12% 1.00% $22,000 $220.00June 9% .75% $12,000 $90.00$705.20b. Long-term financingOn Monthly ActualMonth Rate Basis Amount InterestJanuary 12% 1% $20,000 $200.00February 12% 1% $ 6,000 $60.00March 12% 1% $ 8,000 $80.00April 12% 1% $10,000 $100.00May 12% 1% $22,000 $220.00June 12% 1% $12,000 $120.00$780.00Total dollar interest payments would be larger under thelong-term financing plan.S6-21 17.In problem 16, what long-term interest rate would represent a break-even point betweenusing short-term financing as described in part a and long-term financing? Hint: Divide theinterest payments in 16a by the amount of total funds provided for the six months andmultiply by 12.6-17. Solution:Modern Tombstones (Continued)Divide the total interest payments in part (a) of $705.20 by thetotal amount of funds extended $78,000 ($20,000 + 6,000 + 8,000+ 10,000 + 22,000 + 12,000) and multiply by 12.interest $705.20= = .904% monthly rateprincipal $78,00012×= .904% 10.848% annual rate18.Sherwin Paperboard Company expects to sell 600 units in January, 700 units in February,and 1,200 units in March. January’s ending inventory is 800 units. Expected sales for thewhole year are 12,000 units. Sherwin has decided on a level production schedule of 1,000units (12,000 units/12 months = 1,000 units per month). What is the expected end-of-monthinventory for January, February, and March? Show the beginning inventory, production,and sales for each month to arrive at ending inventory.Beginning Production Ending+-=Salesinventory (level) inventory 6-18. Solution:Sherwin Paperboard CompanyBeginningProductionEnding Inventory+ (level)–Sales=InventoryJanuary 800 1,000 600 1,200February 1,200 1,000 700 1,500March 1,500 1,000 1,200 1,300S6-22 19.Sharpe Computer Graphics Corporation has forecasted the following monthly sales:January .............. $80,000 July .............. $ 30,000February ............ 70,000 August ......... 31,000March ................ 10,000 September ... 40,000April .................. 10,000 October ........ 70,000May ................... 15,000 November .... 90,000June ................... 20,000 December .... 110,000Total annual sales = $576,000 The firm sells its graphic forms for $5 per unit, and the cost to produce the forms is $2per unit. A level production policy is followed. Each month’s production is equal to annualsales (in units) divided by 12. Of each month’s sales, 30 percent are for cash and 70 percent are on account. Allaccounts receivable are collected in the month after the sale is made.a. Construct a monthly production and inventory schedule in units. Beginning inventoryin January is 15,000 units. (Note: To do part a, you should work in terms of units ofproduction and units of sales.)b. Prepare a monthly schedule of cash receipts. Sales in the December before the planningyear are $90,000. Work part b using dollars.c. Determine a cash payments schedule for January through December. The productioncosts of $2 per unit are paid for in the month in which they occur. Other cash payments,besides those for production costs, are $30,000 per month.d. Prepare a monthly cash budget for January through December. The beginning cashbalance is $5,000 and that is also the minimum desired.S6-23 "