Question

1. Becher Industries has three suppliers for its raw materials for manufacturing. The firm purchases $180 million per year from Johnson Corp. and normally takes 30 days to pay these bills. Becher also purchases $150 million per year from Jensen, Inc., and normally pays Jensen in 45 days. Becher’s third supplier, Docking Distributors, offers 2/10, n.30 terms. Becher takes advantage of the discount on the $90 million per year that it typically purchases from Docking. Calculate Becher’s expected accounts payable balance. (Use a 360-day year for your calculations; for example, calculate Johnson’s accounts as $180 million 3 30/360.)

2. Belvedere Inc. has an annual payroll of $52 million. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed on the Tuesday after payday. How much is the payroll accrual at the end of the month?

3. Use the following tax brackets for taxable income: $10,000–$50,000 $50,000–$250,000 Over $250,000 Bracket $0–$10,000 Compute the average tax rate for the following taxable income amounts a. $20,000 b. $125,000 c. $350,000 d. $1,000,000

3. If an investor has a short term view on her investments and in a time of high interest rates - which is better stocks or bonds? Why?

4. Explain the difference between common and preferred stock.

5. If you own 3 stocks A, B, and C. What is your total return of your portfolio? Stock $ invested Return A $ 6,000 6 % B 9,000 9 % C 15,000 11 %

6. Explain the RISK/ REWARD theory?

7. GM issued a $ 1,000, 30-year bond 5 years ago at 9 % interest. Comparable bonds yield 6 % today. What should GM’ bond sell for now?

8. Define each variable in the equation P = (D1 + P1) / (1 + R)

9. Solve the NPV and solve for the Payback YR Cash Flow 0 -$26,000 1 11,000 2 14,000 3 11,000 with the required rate equal to 6%

Answer 1

Solution to first Question:

Calculation of Becher's Expected accounts payable balance.

We assume that all purchases are made evenly throughout the year.We are given with total annual purchases from each of the three suppliers. To find the expected accounts payable balance at any time we know that Becher will have:

30/360th of its annual purchases from Johnson

45/360th of its annual purchases from Jensen

10/360th of its annual purchases from Docking (Since discount is availed)

Therefore, at any point of time in the year we expect the accounts payable balance to be:

From Johnson = $ 180,000,000 x 30/360 = $ 15,000,000

From Jensen = $ 150,000,000 x 45/360 =   $ 18,750,000

From Docking = $ 90,000,000 x 10/360 = $ 2,500,000

Total Accounts payable = $ 36,250,000