1.

Effective Cost of Trade Credit

The D.J. Masson Corporation needs to raise $700,000 for 1 year to supply working capital to a
new store. Masson buys from its suppliers on terms of 2/10, net 90, and it currently pays on the
10th day and takes discounts. However, it could forgo discounts, pay on the 90th day, and get the
needed $700,000 in the form of costly trade credit. What is the effective annual interest rate of
this trade credit? Assume 365 days in year for your calculations. Do not round intermediate
calculations. Round your answer to two decimal places.
%

2. Interest Rate Parity

Assume that interest rate parity holds. In both the spot market and the 90-day forward market 1
Japanese yen equals 0.009 dollar. In Japan, 90-day risk-free securities yield 4.1%. What is the
yield on 90-day risk-free securities in the United States? Round your answer to two decimal
places.
%

3. Foreign Capital Budgeting

The South Korean multinational manufacturing firm, Nam Sung Industries, is debating whether
to invest in a 2-year project in the United States. The project's expected dollar cash flows consist
of an initial investment of $1 million with cash inflows of $700,000 in Year 1 and $600,000 in
Year 2. The risk-adjusted cost of capital for this project is 10%. The current exchange rate is
1,074 won per U.S. dollar. Risk-free interest rates in the United States and S. Korea are:
1-Year
3%
2%

United States
S. Korea

2-Year
3.75%
2.75%

a. If this project were instead undertaken by a similar U.S.-based company with the same
risk-adjusted cost of capital, what would be the net present value generated by this
project? Round your answer to the nearest cent.
$
What would be the rate of return generated by this project? Round your answer to two
decimal places.
%

b. What is the expected forward exchange rate 1 year from now? Round your answer to two
decimal places.
won per U.S. $
What is the expected forward exchange rate 2 years from now? Round your answer to
two decimal places.
won per U.S. $
c. If Nam Sung undertakes the project, what is the net present value and rate of return of the
project for Solitaire? Round your answers to two decimal places.
NPV

won

Rate of return

4. Bank Financing
The Raattama Corporation had sales of $3.3 million last year, and it earned a 5% return (after
taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its
terms of purchase are net 30 days, its accounts payable represent 62 days' purchases. The
company's treasurer is seeking to increase bank borrowings in order to become current in
meeting its trade obligations (that is, to have 30 days' payables outstanding). The company's
balance sheet is as follows (thousands of dollars):
Cash
Accounts receivable
Inventory
Current assets
Land and buildings
Equipment

$100
300
1,400
$1,800
600
600

Accounts payable
Bank loans
Accruals
Current liabilities
Mortgage on real estate
Common stock, $0.10 par
Retained earnings

Total assets

$3,000

Total liabilities and equity

$600
700
200
$1,500
700
300
500
$3,000

a. How much bank financing is needed to eliminate the past-due accounts payable? Round
your answer to the nearest dollar.
$
b. Assume that the bank will lend the firm the amount calculated in part a. The terms of the
loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest

calculation. What is the interest charge for one month? (Assume there are 30 days in a
month.) Round your answer to the nearest dollar.
$
c. Now ignore part b and assume that the bank will lend the firm the amount calculated in
part a. The terms of the loan are 7.4%, add-on interest, to be repaid in 12 monthly
installments.
1. What is the total loan amount? Round your answer to the nearest dollar.
$
2. What are the monthly installments? Round your answer to the nearest dollar.
$
3. What is the APR of the loan? Round your answer to two decimal places.
%
4. What is the effective rate of the loan? Round your answer to two decimal places.
%

d. Would you, as a bank loan officer, make this loan? YES/NO

5. Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's
Doll Shop. Business has been good, but Koehl has frequently run out of cash. This has
necessitated late payment on certain orders, which is beginning to cause a problem with
suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs
a forecast of just how much she must borrow. Accordingly, she has asked you to prepare a cash
budget for the critical period around Christmas, when needs will be especially high.
Sales are made on a cash basis only. Koehl's purchases must be paid for during the following
month. Koehl pays herself a salary of $4,800 per month, and the rent is $2,700 per month. In
addition, she must make a tax payment of $14,000 in December. The current cash on hand (on
December 1) is $700, but Koehl has agreed to maintain an average bank balance of $4,500 - this
is her target cash balance. (Disregard cash in the till, which is insignificant because Koehl keeps
only a small amount on hand in order to lessen the chances of robbery.)
The estimated sales and purchases for December, January, and February are shown below.
Purchases during November amounted to $160,000.

Sales

Purchases

$150,000

$35,000

January

48,000

35,000

February

56,000

35,000

December

a. Prepare a cash budget for December, January, and February.

I. Collections and Purchases:
December

January

February

Sales

Purchases

Payments for purchases $

Salaries

Rent

Taxes

Total payments

--$

Cash at start of forecast $

--$

---

---

Net cash flow

Cumulative NCF

Target cash balance

Surplus cash or loans

needed

b. Now, suppose Koehl starts selling on a credit basis on December 1, giving customers 30
days to pay. All customers accept these terms, and all other facts in the problem are
unchanged. What would the company's loan requirements be at the end of December in
this case? (Hint: The calculations required to answer this question are minimal.)
$

6. Cross Rates
At today's spot exchange rates 1 U.S. dollar can be exchanged for 11 Mexican pesos or for
111.43 Japanese yen. You have pesos that you would like to exchange for yen. What is the cross
rate between the yen and the peso; that is, how many yen would you receive for every peso
exchanged? Round your answer to two decimal places.
yen per peso