Ch08 Sm Petty Fmpa6e
CHAPTER 8
Current asset management
SOLUTIONS TO PROBLEMS
8-2* (a) Recommendation (i) 0.105 × $800 000 × 1/12 = $7,000 < $20,000 No (ii) 0.105 × $800,000 × 2/12 = $14,000 < $20,000 No (iii) 0.105 × $800,000 ×3/12 = $21,000 > $20,000 Yes (iv) 0.105 × $800,000 × 6/12 = $42,000 > $20,000 Yes (v) 0.105 × $800,000 ×12/12 = $84,000 > $20,000 Yes (b) Let y be the break-even yield. With $800,000 to invest for two months and a two-month holding period, we have:
8-6* (a) Price = PV of coupon payment annuity + PV of maturity value: or 1000 +/- FV 60 +/- PMT 15 N 9 I/Y COMP PV giving $758.18 or using APPENDIX D, using APPENDIX B,
Total Present Value ≈ 483.66 + 275.00 ≈ $758.66
(b) $1,000 – $758.66 = $241.34 loss
(c) First, we find the price of an otherwise equivalent bond which has 1 year remaining to maturity. Thus, n = 1, PMT = $60, FV = $1,000 and i = 9%. Computing PV by the same methods as shown in (a) above gives a price of $972.48. Loss = $1,000 – $972.48 = $27.52
The loss on the shorter-term bond is much less than that suffered on the longer-term instrument.
(d) Interest-rate risk.
8-11*
where a = amount of the discount b = the discount period c = the net period (a) (b) (c) (d) (e) (f)
8-12* Note: This exercise attempts to illustrate that a change in the firm’s accounts payable policy can properly be viewed as a part of the overall problem of cash management. Before evaluating the 45-day and 60-day payment alternatives it is necessary to calculate the amount of purchases that are actually discounted and the value of the annual purchase discount earned by Meadowbrook. These amounts are calculated below: Purchases discounted = 0.25 × $40,000,000 annual purchases = $10,000,000 Purchase discounts earned = 0.03 × $10,000,000 = $300,000 With $300,000 in purchase discounts earned, Meadowbrook actually pays: $10,000,000 – $300,000 = $9,700,000, 10 days after
Current asset management
SOLUTIONS TO PROBLEMS
8-2* (a) Recommendation (i) 0.105 × $800 000 × 1/12 = $7,000 < $20,000 No (ii) 0.105 × $800,000 × 2/12 = $14,000 < $20,000 No (iii) 0.105 × $800,000 ×3/12 = $21,000 > $20,000 Yes (iv) 0.105 × $800,000 × 6/12 = $42,000 > $20,000 Yes (v) 0.105 × $800,000 ×12/12 = $84,000 > $20,000 Yes (b) Let y be the break-even yield. With $800,000 to invest for two months and a two-month holding period, we have:
8-6* (a) Price = PV of coupon payment annuity + PV of maturity value: or 1000 +/- FV 60 +/- PMT 15 N 9 I/Y COMP PV giving $758.18 or using APPENDIX D, using APPENDIX B,
Total Present Value ≈ 483.66 + 275.00 ≈ $758.66
(b) $1,000 – $758.66 = $241.34 loss
(c) First, we find the price of an otherwise equivalent bond which has 1 year remaining to maturity. Thus, n = 1, PMT = $60, FV = $1,000 and i = 9%. Computing PV by the same methods as shown in (a) above gives a price of $972.48. Loss = $1,000 – $972.48 = $27.52
The loss on the shorter-term bond is much less than that suffered on the longer-term instrument.
(d) Interest-rate risk.
8-11*
where a = amount of the discount b = the discount period c = the net period (a) (b) (c) (d) (e) (f)
8-12* Note: This exercise attempts to illustrate that a change in the firm’s accounts payable policy can properly be viewed as a part of the overall problem of cash management. Before evaluating the 45-day and 60-day payment alternatives it is necessary to calculate the amount of purchases that are actually discounted and the value of the annual purchase discount earned by Meadowbrook. These amounts are calculated below: Purchases discounted = 0.25 × $40,000,000 annual purchases = $10,000,000 Purchase discounts earned = 0.03 × $10,000,000 = $300,000 With $300,000 in purchase discounts earned, Meadowbrook actually pays: $10,000,000 – $300,000 = $9,700,000, 10 days after