Exam 8: Financing a Business 1: Sources of Funds

Comfort Corporation offer its customers payment terms of a 2% discount if they pay in the first 10 days of receiving the invoice or paying the net amount up until 45 days after receipt. If a customer has the option of borrowing from the bank to pay the invoice right away at what interest rate on the borrowings will it make no difference to take the discount or to borrow the money?

Gamesoft Inc. has $100 million in annual credit sales that take an average of 40 days to collect. to meet Gamesoft's cash flow problems it maintains a floating loan at 10% interest. Gamesoft says they are indifferent to factoring their receivables at a 3% fee. The factor would advance 70% of the receivables at 8% interest, would cut the collection period down to only 30 days, and eliminate all bad debts. What is the amount of Gamesoft's bad debts that exist by collecting the receivables on its own?

Emmilou's Designs, a Canadian exporter, operates in international currencies to transact business on both sides of the Atlantic and so, at a time when the Canadian dollar (CAN) was at $0.97 of the US dollar (USD) and the Euro was trading at .625USD, Emmilou Designs issued 5-year Eurobonds which provided them with the equivalent of $5,000,000CAN. At maturity, the Canadian dollar was worth $1.01USD and the Euro at 0.635USD. What was the financial impact of the exchange rates, in Canadian dollars, in the repayment of the face value of the Eurobonds at maturity?

A piece of capital equipment which a company needs for the next three years will cost $150,000 to purchase, with residual value of $50,000. The company can finance the purchase with a loan at 8% requiring quarterly payments. Alternately, the company can undertake a capital lease for the same machinery at $11,494 a quarter and a promise to return the machine at a value of $50,000. Why might the company choose the leasing alternative over the purchase alternative?

To establish the credit ratings that are used in the financial industry to represent the level of default risk associated with a bond, what do credit rating agencies do?

A company has 16 million common shares outstanding and on Dec. 31st, declared a year-end net income after tax of $48 million. It pays a fixed dividend of $1.20 on its 4.8 million preferred shares outstanding. The company's has expanded rapidly and traded steadily at a price/earnings ratio of 32. Four years ago, it issued $42 million worth of debt at 4% compounded annually with a convertible feature that could be exercised December 31st of year 4 of the loan at a price of $84.00. If the company issues new shares to the bondholders, what is the dilution in current earnings per share if maximum conversion occurs?

Greenland Dairy has annual credit sales of $29.2 million. The company's collection period is 45 days. The company has been financing its receivables with a bank overdraft at 17%. A proposal from a factoring business offers a cash advance of 80% of receivables at an interest rate of 14%. Further, the factor expects to collect all receivables within 40 days and charge 2% of collections. Greenland will save $50,000 in collections administration. Which of the following will the factoring arrangement do?

Which of the following best describes the pecking order theory?

What does it mean when an investor says she has invested in a twenty-year zero-coupon bond?

What provides the borrower the most flexibility in terms of paying for its financing?

A form of funds available to non-Canadian borrowers, known as Maple bonds, were developed. Why are attractive to investors?

Raven Corporation has 4.8 million shares, 20% of which are cumulative preferred paying a fixed 5% of the $20 face value of the shares. The rest are common shares. Because of loan covenants, the company is restricted to paying out a maximum of 24% of its annual net income after tax in dividends or any dividends if after tax profit drops below $4.5 million. Over the past four years Raven has had net income after tax of $8 million, $6 million, $3 million, $6 million. What is the total value of dividends paid out to common shares in the past four years if the company tries to achieve a maximum payout?

Rocket Potassium Ltd. has $15 million in credit sales per year and on average they are outstanding for 75 days. Each rocket dosage sells for $1,000 and results in a 10% contribution margin. Receivables are financed at a 12% interest rate. Bad debts total $350,000 annually. The accounting department has a new plan by which it estimates it can eliminate half of the bad debts and reduce the collection period by 30 days if it is permitted to hire two collections specialists at a cost of $85,000 per year each. The new plan would result in 2% lost sales. How much better off would the new plan leave Rocket Potassium?

What is the value that will be entered on both sides of Atlas Asbestos Ltd.'s balance sheet if the company's capital leasing contract calls for quarterly payments of $3,535 for five years beginning three months from now at an interest rate of 12% compounded four times year?

Which of the following is an example of an appropriate matching of sources of funds with uses of funds?

A company seeks a one-time loan on 75% of the face value of its accounts receivable outstanding and must pay within 60 or 90 days regardless of whether it has collected its receivables. What type of financing is the company seeking?

Which of the following is/are pledged as a form of loan security called a floating charge?

Five years ago, Raleigh Corporation issued $5 million in 20-year bonds, face value of $1000 and interest at 10% compounded semi-annually, paid twice a year. Interest rates have dropped to 8%. The bonds had a call provision that allowed Raleigh to buy them back at 102.5% of face. Ignoring issuing costs, what is the difference between the total exercise price and the fair value of the bonds?

Great Systems Inc. (GSI), a publicly-traded company, needs $30 million additional financing to repair its balance sheet and to expand into the cloud computing infrastructure market. Somes of GSI's balance sheet classification amounts, in millions, are as follows: Current assets $10; Property, plant, and equipment $90; Current liabilities $30; Long term liabilities $35; retained earnings 10. How should GSI raise the needed $30 million?

ABC Corp. needs $8,000,000 of debt for a quarter share fractional ownership of a Gulfstream IV executive jet. If the company's investment banker has offered to raise the financing by way of a zero coupon (strip) bond with a yield to maturity in 15 years of 6%, what will ABC Corporation's total cash outflow be at maturity?