P1. Pretty Lady Cosmetic Products has an average production process time of forty days. Finished goods are kept on hand for an average of fifteen days before they are sold. Accounts receivable are outstand-ing an average of thirty- five days, and the firm receives forty days of credit on its purchases from suppliers.
a. Estimate the average length of the firmâ€™s short- term operating cycle. How often would the cycle turn over in a year?
b. Assume net sales of $ 1,200,000 and cost of goods sold of $ 900,000. Determine the average investment in accounts receivable, inventories, and accounts payable. What would be the net financing need considering only these three accounts?
P3. Obtain a current issue of the Federal Reserve Bulletin, or review a copy from the Fedâ€™s Web site ( http:// www. federalreserve. gov) or the St. Louis Fedâ€™s Web site ( http:// www. stlouisfed. org), and determine the changes in the prime rate that have occurred since the end of 2000. Comment on any trends in the data.
P4. Compute the effective cost of not taking the cash discount under the following trade credit terms:
a. 2/ 10 net 40
b. 2/ 10 net 50
c. 3/ 10 net 50
d. 2/ 20 net 40
Suppose the Quick Towing Company purchases a new tow truck. The old truck had a book value of $ 1,000 and was sold for $ 1,420. If Quick Towing is in the 34 percent marginal tax bracket, what is the tax liability on the sale of the truck? What is the after- tax cash flow on the sale?
P7 The No- Shoplift Security Company is interested in bidding on a contract to provide a new security system for a large department store chain. The new security system would be phased into 10 stores per year for five years. No- Shoplift can purchase the hardware for $ 50,000 per installation. The labor and material cost per installation is approximately $ 15,000. In addition, No- Shoplift will need to purchase $ 100,000 in new equipment for the installation, which will be depreciated to zero using the straight- line method over five years. This equipment will be sold in five years for $ 25,000. Finally, an investment of $ 50,000 in net working capital will be needed. Assume that the relevant tax rate is 34 percent. If the No- Shoplift Security Company requires a 10 percent return on its investments, what price should it bid?
P8 The Nutrex Corporation wants to calculate its weighted average cost of capital. Its target capital structure weights are 40 percent long- term debt and 60 percent common equity. The before- tax cost of debt is estimated to be 10 percent and the company is in the 40 percent tax bracket. The current risk- free interest rate is 8 percent on Treasury bills. The expected return on the market is 13 percent and the firmâ€™s stock beta is 1.8.
a. What is Nutrexâ€™s cost of debt?
b. Estimate Nutrexâ€™s expected return on common equity using the security market line.
c. Calculate the after- tax weighted average cost of capital.