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    Solution: Mcgriff Dog Food Company

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    Anna Charlotte
    The document describes a promotional campaign that would increase sales by $400,000 for Global Services. It calculates the investments required in accounts receivable, inventory, and plant/equipment due to this increase. It then determines the collection costs, production costs, inventory carrying costs, and depreciation expenses associated with the additional sales. After subtracting these costs from the increased sales, it finds the after-tax income would be $46,200. Compared to the required $350,000 total investment, this yields a 13.2% return which is above the required 12% return, so the promotional campaign should be undertaken.

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    Solution: Mcgriff Dog Food Company

    Uploaded by

    Anna Charlotte
    98 views6 pages
    The document describes a promotional campaign that would increase sales by $400,000 for Global Services. It calculates the investments required in accounts receivable, inventory, and plant/equipment due to this increase. It then determines the collection costs, production costs, inventory carrying costs, and depreciation expenses associated with the additional sales. After subtracting these costs from the increased sales, it finds the after-tax income would be $46,200. Compared to the required $350,000 total investment, this yields a 13.2% return which is above the required 12% return, so the promotional campaign should be undertaken.

    Original Title

    2009-03-28_124223_Owen

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    The document describes a promotional campaign that would increase sales by $400,000 for Global Services. It calculates the investments required in accounts receivable, inventory, and plant/equipment due to this increase. It then determines the collection costs, production costs, inventory carrying costs, and depreciation expenses associated with the additional sales. After subtracting these costs from the increased sales, it finds the after-tax income would be $46,200. Compared to the required $350,000 total investment, this yields a 13.2% return which is above the required 12% return, so the promotional campaign should be undertaken.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    98 views6 pages

    Solution: Mcgriff Dog Food Company

    Uploaded by

    Anna Charlotte
    The document describes a promotional campaign that would increase sales by $400,000 for Global Services. It calculates the investments required in accounts receivable, inventory, and plant/equipment due to this increase. It then determines the collection costs, production costs, inventory carrying costs, and depreciation expenses associated with the additional sales. After subtracting these costs from the increased sales, it finds the after-tax income would be $46,200. Compared to the required $350,000 total investment, this yields a 13.2% return which is above the required 12% return, so the promotional campaign should be undertaken.

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    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 6

    8-10)

    McGriff Dog Food Company normally takes 20 days to pay for average daily
    credit purchases of $9,000. Its average daily sales are $10,000, and it collects
    accounts in 25 days.

    a. What is its net credit position? That is, compute its accounts receivable and
    accounts payable and subtract the latter from the former.

    Accounts receivable = Average daily credit sales * Average collection period


    Accounts payable = Average daily credit purchases * Average payment period

    b. If the firm extends its average payment period from 20 days to 32 days (and
    all else remains the same), what is the firm's new net credit position? Has it
    improved its cash flow?

    Solution:
    McGriff Dog Food Company

    a. Net credit position = Accounts Receivable – Accounts payable


    Accounts receivable = average daily * average collection
    credit sales period
    $10,000 * 25 = $250,000

    Accounts payable = average daily * average payment


    credit purchases period
    Payment Period = $9,000 * 20 = $180,000
    Net Credit Position = $250,000 – $180,000 = $70,000

    b. Accounts Receivable will remain at $250,000


    Accounts Payable = $9,000 * 32 = 288,000
    Net Credit Position ($ 38,000)

    The firm has improved its cash flow position. Instead of


    extending $70,000 more in credit (funds) than it is
    receiving, it has reversed the position and is the net
    recipient of $38,000 in credit.
    8-16. Your company plans to borrow $5 million for 12 months, and your banker
    gives you a stated rate of 14 percent interest. You would like to know the
    effective rate of interest for the following types of loans. (Each of the following
    parts stands alone.)

    a. Simple 14 percent interest with a 10 percent compensating balance.


    b. Discounted interest.
    c. An installment loan (12 payments).
    d. Discounted interest with a 5 percent compensating balance.

    Solution:

    a. Simple interest with a 10% compensating balance

    $700,000 $700,000
    1   15.56%
    $5,000,000  $500,000 $4,500,000

    b. Discounted interest

    $700,000 $700,000
    1   16.28%
    $5,000,000  $700,000 $4,300,000

    c. An installment loan with 12 payments

    2  12  $700,000 $16,800,000
      25.85%
    13  $5,000,000 $65,000,000

    d. Discounted interest with a 5% compensating balance

    $700,000/($5,000,000 – $700,000 – $250,000) =


    $700,000/$4,050,000 = 17.28%

    8-23)
    Summit Record Company is negotiating with two banks for a $100,000 loan.

    Fidelity Bank requires a 20 percent compensating balance, discounts the loan,


    and wants to be paid back in four quarterly payments. Southwest Bank requires
    a 10 percent compensating balance, does not discount the loan, but wants to be
    paid back in 12 monthly installments. The stated rate for both banks is 9
    percent. Compensating balances will be subtracted from the $100,000 in
    determining the available funds in part a.

    a. Which loan should Summit accept?


    b. Recompute the effective cost of interest, assuming that Summit ordinarily
    maintains at each bank $20,000 in deposits that will serve as compensating
    balances.
    c. Does your choice of banks change if the assumption in part b is correct?

    Solution:
    Summit Record Company

    a. Fidelity Bank

    Effective interest rate


    2  4  $9,000

     $100,000  $20,000  $9,000   4  1
     $72,000 / $355,000  20.28%

    Southwest Bank

    Effective interest rate

    2  12  $9,000

     $100,000  $10,000  12  1
     $216,000 / $1,170,000  18.46%

    Choose Southwest Bank since it has the lowest effective


    interest rate.

    b. The numerators stay the same as in part (a) but the


    denominator increases to reflect the use of more money
    because compensating balances are already maintained at
    both banks.

    Fidelity Bank

    Effective interest rate = $72,000/($100,000 – $9,000) * 5


    = $72,000/$455,000 = 15.82%

    Southwest Bank

    Effective interest rate = $216,000/($100,000 * 13)


    = $216,000/$1,300,000 = 16.62%

    c. Yes. If compensating balances are maintained at both


    banks in the normal course of business, then Fidelity
    Bank should be chosen over Southwest Bank. The
    effective cost of its loan will be less.

    7-19)

    Global Services is considering a promotional campaign that will increase annual credit
    sales by $400,000. The company will require investments in accounts receivable,
    inventory, and plant and equipment. The turnover for each is as follows:
    Accounts r receivable - 4x
    Invenotry - 8x
    Plant & Equipment - 2x
    All 400,000 of the sales will be collectible. However, collection costs will be 4% of sales,
    and production and selling costs will be 76% of sales. The cost to carry inventory will be
    8% of inventory. Depreciation expense on plant & equipment will be 5% of plant &
    equipment. The tax rate is 30%.
    a. Compute the investments in accounts receivable, inventory, and plant & equipment
    based on turnover ratios. Add the three together.

    Investment required in accounts receivable=Increase in sales/Accounts receivable


    turnover = $400,000 / 4

    =$100,000
    Investment required in inventory = $400,000 / 8

    = $50,000

    Investment required in Plant and Equipment

    = $400,000/2

    = $200,000

    Total investment required = $100,000 + $50,000 + $200,000

    = $350,000

    b. compute the accounts receivable collection costs and production and selling costs and
    add the two figures together.

    Accounts receivable collection costs = $400,000*4%

    = $16,000

    Production and selling costs = $400,000*76%

    = $304,000

    Total collection and production costs = $320,000

    c. Compute the cost of carrying inventory.

    Cost of carrying inventory =8% of investment in inventory


                                        
    = $50,000*8%

    =$4,000

    d. Compute the depreciation expense on the new plant & equipment.

    Depreciation expanses = 5% of investment in Plant and equipment

    = 5%* $200,000

    = $10,000

    e. add together all the costs in parts, b, c, d.


    Total costs = $320,000 + $4,000 + $10,000

    =$334,000

    f. Subtract the answer from part e from the sales figure of 400,000 to arrive at income
    before taxes. Subtract taxes at the rate of 30% to arrive at income after taxes.

    Income before taxes = $400,000 - $334,000

    = $66,000

    Income after taxes = $66,000*(1-30%)

    = $46,200

    g. divide the aftertax return figure in part f by the total investment in part a. If the firm
    has a required return on investment of 12%, should it undertake the promotional
    campaign described throughout this problem.

    Rate of return = $46,200 / $350,000

    = 13.20%

    Since the Rate of return is more than required rate of return, the company should
    take promotional campaign

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