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. 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.
   %

2. 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. $

3. 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):

1. How much bank financing is needed to eliminate the past-due accounts payable? Round your answer to the nearest dollar.
   $  
2. 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.
   $  
3. 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.
      %

1. 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.

1. 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	$	$	$

1. 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

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