Reference no: EM132379761

Problem Set: Short-Term and Long-Term Financial Decisions

Complete the following problems from Chapters 13-16 in Principles of Managerial Finance: Long-Term and Short-Term Financial Decisions:

1. Leverage and Capital Structure: P13-7
2. Policy: P14-9
3. Chapter 16: Current Liabilities Management: P16-20

Problem 1: Breakeven analysis Molly Jasper and her sister, Caitlin Peters, got into the novelties business almost by accident. Molly, a talented sculptor, often made little figurines as gifts for friends. Occasionally, she and Caitlin would set up a booth at a crafts fair and sell a few of the figurines along with jewelry that Caitlin made. Little by little, demand for the figurines, now called Mollycaits, grew, and the sisters began to reproduce some of the favorites in resin, using molds of the originals. The day came when a buyer for a major department store offered them a contract to produce 1,500 figurines of various designs for $10,000. Molly and Caitlin realized that it was time to get down to business. To make bookkeeping simpler, Molly had priced all the figurines at $8.00 each. Variable operating costs amounted to an average of $6.00 per unit. To produce the order, Molly and Caitlin would have to rent indus-trial facilities for a month, which would cost them $4,000

a. Calculate Mollycaits' operating breakeven point.

b. Calculate Mollycaits' EBIT on the department store order.

c. If Molly renegotiates the contract at a price of $10.00 per figurine, what will the EBIT be?

d. If the store refuses to pay more than $8.00 per unit but is willing to negotiate quantity, what quantity of figurines will result in an EBIT of $4,000?

e. At this time, Mollycaits come in 15 different varieties. Whereas the average vari-able cost per unit is $6.00, the actual cost varies from unit to unit. What recom-mendation would you have for Molly and Caitlin with regard to pricing and the numbers and types of units that they offer for sale?

Problem 2: Stock dividend: Firm Columbia Paper has the following stockholders' equity account. The firm's common stock has a current market price of $30 per share.Preferred stock $100,000Common stock (10,000 shares at $2 par) $20,000Paid-in capital in excess of par $280,000 Retained earnings $100,000 Total stockholders' equity $500,000
a. Show the effects on Columbia of a 5% stock dividend
b. Show the effects of (1) a 10% and (2) a 20% stock dividend.
c. In light of your answers to parts a and b, discuss the effects of stock dividends on stockholders' equity.

Problem  3: Inventory financing Raymond Manufacturing faces a liquidity crisis: It needs a loan of $100,000 for 1 month. Having no source of additional unsecured borrowing, the firm must find a secured short-term lender. The firm's accounts receivable are quite low, but its inventory is considered liquid and reasonably good collateral. The book value of the inventory is $300,000, of which $120,000 is finished goods. (Note: Assume a 365-day year.)

(1) City-Wide Bank will make a $100,000 trust receipt loan against the finished goods inventory. The annual interest rate on the loan is 12% on the outstanding loan balance plus a 0.25% administration fee levied against the $100,000 initial loan amount. Because it will be liquidated as inventory is sold, the average amount owed over the month is expected to be $75,000.

(2) Sun State Bank will lend $100,000 against a floating lien on the book value of inventory for the 1-month period at an annual interest rate of 13%.

(3) Citizens' Bank and Trust will lend $100,000 against a warehouse receipt on the finished goods inventory and charge 15% annual interest on the outstanding loan balance. A 0.5% warehousing fee will be levied against the average amount borrowed. Because the loan will be liquidated as inventory is sold, the average loan balance is expected to be $60,000.

a. Calculate the dollar cost of each of the proposed plans for obtaining an initial loan amount of $100,000.
b. Which plan do you recommend? Why?
c. If the firm had made a purchase of $100,000 for which it had been given terms of 2/10 net 30, would it increase the firm's profitability to give up the discount and not borrow as recommended in part b? Why or why not?