"7.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. Procterdecides to do economic forecasting and determines that if he utilizes short-term financinginstead, he will pay 6.55 percent interest in the first year and 10.95 percent interest in thesecond year. Determine the total two-year interest cost under each plan. Which plan is less costly?6-7. Solution:Procter-Mini-Computers, Inc. Cost of Two Year Fixed Cost Financing$1,200,000 borrowed × 9.5% per annum × 2 years = $228,000 interest Cost of Two Year Variable Short-term Financingst 1 year $1,200,000 × 6.55% per annum = $78,600 interest costnd 2 year $1,200,000 × 10.95% per annum = $131,400 interest cost $210,000 two-year totalThe short-term plan is less costly.S6-9 8.Sauer Food Company has decided to buy a new computer system with an expected life ofthree 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 thecomputer 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. Whatif interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3?What would be the total interest cost compared to the 10 percent, three-year loan?6-8. Solution:Sauer Food CompanyIf Rates Are Constant$150,000 borrowed × 8% per annum × 3 years = $36,000 interest cost$150,000 borrowed × 10% per annum × 3 years = $45,000 interest cost$45,000 – $36,000 = $9,000 interest savings borrowingshort-termIf Short-term Rates Changest1 year $150,000 × .08 = $12,000nd 2 year $150,000 × .13 = $19,500rd 3 year $150,000 × .18 = $27,000 Total = $58,500$58,500 – $45,000 = $13,500 extra interest costsborrowing short-term.S6-10 9.Assume Stratton Health Clubs, Inc., has $3,000,000 in assets. If it goes with a low liquidityplan for the assets, it can earn a return of 20 percent, but with a high liquidity plan, thereturn will be 13 percent. If the firm goes with a short-term financing plan, the financingcosts on the $3,000,000 will be 10 percent, and with a long-term financing plan, thefinancing 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 with the most aggressive asset- financing mix.b. Compute the anticipated return after financing costs with the most conservative asset- financing mix.c. Compute the anticipated return after financing costs with the two moderate approachesto the asset-financing mix.d. Would you necessarily accept the plan with the highest return after financing costs?Briefly explain.6-9. Solution:Stratton Health Clubs, Inc.a. Most aggressiveLow liquidity/high return $3,000,000 × 20% = $600,000Short-term financing –3,000,000 × 10% = –300,000Anticipated return$300,000b. Most conservativeHigh liquidity/low return $3,000,000 × 13% = $390,000Long-term financing –3,000,000 × 12% = –360,000Anticipated return$ 30,000c. Moderate approachLow liquidity $3,000,000 × 20% = $600,000Long-term financing –3,000,000 × 12% = –360,000$240,000ORHigh liquidity $3,000,000 × 13% = $390,000Short-term financing –3,000,000 × 10% = –300,000$ 90,000S6-11 6-9. (Continued)d. You may not necessarily select the plan with the highestreturn. You must also consider the risk inherent in the plan.Of course, some firms are better able to take risks thanothers. The ultimate concern must be for maximizing theoverall valuation of the firm through a judiciousconsideration of risk-return options.10.Assume that Atlas Sporting Goods, Inc., has $800,000 in assets. If it goes with a low- liquidity plan for the assets, it can earn a return of 15 percent, but with a high-liquidity planthe return will be 12 percent. If the firm goes with a short-term financing plan, thefinancing costs on the $800,000 will be 8 percent, and with a long-term financing plan, thefinancing costs on the $800,000 will be 10 percent. (Review Table 6-11 for parts a, b, and cof this problem.)a. Compute the anticipated return after financing costs with the most aggressive asset- financing mix.b. Compute the anticipated return after financing costs with the most conservative asset- financing mix.c. Compute the anticipated return after financing costs with the two moderate approachesto the asset-financing mix.d. If the firm used the most aggressive asset-financing mix described in part a and had theanticipated return you computed for part a, what would earnings per share be if the taxrate on the anticipated return was 30 percent and there were 20,000 shares outstanding?e. Now assume the most conservative asset-financing mix described in part b will beutilized. The tax rate will be 30 percent. Also assume there will only be 5,000 sharesoutstanding. What will earnings per share be? Would it be higher or lower than theearnings per share computed for the most aggressive plan computed in part d?S6-12 6-10. Solution:Atlas Sporting Goods, Inc.a. Most aggressiveLow liquidity $800,000 × 15%= $120,000Short-term financing 800,000 × 8%=–64,000Anticipated return$ 56,000b. Most conservativeHigh liquidity $800,000 × 12%= $ 96,000Long-term financing 800,000 × 10%=–80,000Anticipated return$ 16,000c. Moderate approachLow liquidity $800,000 × 15%= $120,000Long-term financing 800,000 × 10%=–80,000Anticipated return$ 40,000-OR-High liquidity $800,000 × 12%= $ 96,000Short-term financing 800,000 × 8%=–64,000Anticipated return$ 32,000d. Anticipated return $ 56,000 – taxes (30%)16,800 Earnings after taxes 39,200 Shares 20,000 Earnings per share $1.96e. Anticipated return $ 16,000 –taxes (30%)4,800 Earnings after taxes 11,200 Shares 5,000 Earnings per share $2.24It is higher ($2.24 vs. $1.96)S6-13 "