Gardner Company currently makes all sales on credit and offers no cash discount

Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm’s current average collection period is 60 days, sales are 40,000 units, selling price is $45 per unit, and variable cost per unit is $36. The firm expects that the change in credit terms will result in an increase in sales to 42,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm’s required rate of return on equal-risk investments is 25%, should the proposed discount be offered? (Note: Assume a 365-day year.)


Click here for the solution: Gardner Company currently makes all sales on credit and offers no cash discount

An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

15-37 (Accounting Estimates) An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2% for each month delivery is delayed beyond December 31, 2009. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.

Required
A. What factors should be considered in making an estimate of the loss accrual?
B. Assuming the amount of the purchase commitment is material, what information should management disclose in the footnotes to the financial statements concerning this purchase commitment?


Click here for the solution: An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects

Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects. Project Hydrogen requires an initial outlay of $25,000; project Helium requires an initial outlay of $35,000. Using the expected cash inflows given for each project in the following table, calculate each project's payback period. Which project meets Elysian's standards?

Expected cash inflows
Year Hydrogen Helium
1 $6000 $7000
2 6,000 7,000
3 8,000 8,000
4 4,000 5,000
5 3,500 5,000
6 2,000 4,000

Click here for the solution: Elysian Fields, Inc., uses a maximum payback period of 6 years and currently must choose between two mutually exclusive projects

The common stock of Warner Inc. is currently selling at $110 per share

E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding.

Instructions
Prepare the necessary journal entries assuming the following.
(a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
(c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

Click here for the solution: The common stock of Warner Inc. is currently selling at $110 per share

(Nonconstant Growth Valuation) A company currently pays a dividend of $2 per share (D0 = $2)

(Nonconstant Growth Valuation)  A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?

Click here for the solution: (Nonconstant Growth Valuation) A company currently pays a dividend of $2 per share (D0 = $2)

The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box

E13-2 The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box. If the firm has a potential investment that would simultaneously raise its fixed costs to $16,500 and allow it to charge a per-box sale price of $6.50 due to better-textured tacos, what will the impact be on its operating breakeven point in boxes?

Click here for the solution: The Great Fish Taco Corporation currently has fixed operating costs of $15,000, sells its premade tacos for $6 per box, and incurs variable operating costs of $2.50 per box

You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56)

You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56). You expect the price of the pound to decline (i.e. the value of the dollar to rise.) If this expectation is fulfilled, you will suffer a loss when the pounds are converted into dollars when you receive them six months in the future.
a. Given the current price, what is the expected payment in dollars?
b. Given the futures price, how much would you receive in dollars?
c. If, after six months the pound is worth $1.35, what is your loss from the decline in the value of the pound?
d. To avoid this potential loss, you decide to hedge and sell a contract for the future delivery of pounds at the going futures price of $1.56. What is the cost to you of this protection from the possible decline in the value of the pound?
e. If, after hedging, the price of the pound falls to $1.35, what is the maximum amount that you lose? Why is your answer different from (c)?
f. If, after hedging the price of the pound rises to $1.80, how much do you gain from your position?
g. How would your answer to part (f) be different if you had not hedged and the price of the pound had risen to $1.80?

Click here for the solution: You expect to receive a payment of 1,000,000 in British pounds after six months the pound is currently worth $1.60 (i.e. 1 pound = $1.60), but the six-month futures price is $1.56 (i.e. 1 pound = $1.56)